Monday, July 30, 2012

Weekend edition: Car Dealers

I am a hedge fund manager who trades in marketable securities only. I look at a quote in a market - take it or leave it.

I have developed no negotiating skill - if I don't like the quote I just walk away. If the quote is way too high I short sell it. If it is low I buy.

But mostly I just walk away. It is not rude to walk away. The person on the other side of the trade does not even know who you are. It is not personal. Simply: if the quote is not right I do not want to deal.

If I have to negotiate I will generally leave it to my wife who has more patience whilst people muck around on price. People who want to waste half an hour negotiating to an end point that could be got to in 2 minutes are a waste of time and space.

Further - mostly I short-sell frauds. I find people who are lying (and I am very good at determining when someone is lying). Whey they lie I short-sell their securities. The slogan (mostly true) is once a scumbag always a scumbag. Shortselling scumbags in moderation (always in moderation) is generally a profitable strategy.

And so I come with a general hatred of buying a car.

These days buying a car is a fairly transparent business. They give you a quote off something that looks like a supplier provided list price. You ask them if they can do a better deal and depending on how ambitious they are and how much room to move they have they offer you a "deal".

Then you go home, look up the internet chat boards, see what people have negotiated elsewhere and come back with a price.

We did that - and the price we came back with was about 5 percent below where I figured they were prepared to deal. I told them I had looked at the chat boards and told them that price was lower than I expected and that they should just come back with something realistic.

The told me that they would be losing $4000 at the price I suggested.

I knew that was a lie. They knew I knew it was a lie. I said so and said that I will not deal if they will not be straight with me. They bristled.

I walked out. I don't have the patience to deal with scumbags and liars.

If this were senior management/promoters of a listed security I know what I would do. I would turn around and short-sell them. Liars then are nice because they are profitable for me.

But dealing with scumbag car-dealers makes me feel strangely powerless and angry.

And it leaves me despising car dealers and the companies they represent. I am not even going to mention the brand because I suspect it could be any car brand.

[Still for the rest of my life XXX Brand will be associated with scumbag people and no amount of advertising will fix the image-association.]

Why are people like this?

Here is a question that has puzzled me for a while. I short sell stocks promoted by slime-bag individuals. People who may be rich but you would be horrified if they married your daughter.

There are a surprisingly large number of such people around.

My question was were those people born that way or did 10 years of exposure to other scum-bags on Wall Street turn them into the gebbeths they have become? Understanding the development and career path of scumbag stock promoters will make my job easier. Finding these little piles of pus and short-selling their wares is one of my main career tasks.

But it is hard to track stock promoters. They are a shadowy lot and saying out loud that they are slime doesn't get me very far.

But it is easy to track car dealers - and their sliminess is readily apparent to all. It is not even controversial.

So how did car dealers get this way? Do car dealers actively go out of their way to recruit more scumbags? Or does being a car dealer turn you into a scumbag?

If it is the former how do they find these scumbags so effectively? (As someone who short-sells I want to copy that method!)

If it is the latter how long does it take as a car dealer before the basics of human decency have been stripped from you? How hard is it to corrupt people - to take away their soul?

Just asking.




John

63 comments:

Anonymous said...

People actually like to be lied to by car dealers. GM once created an entire brand - Saturn - around the idea of "fixed price no negotiating" in an effort to eliminate the "lying scumbag" part of their story - and the fact is that Saturn didn't make it.

SB

Robert in Chicago said...

I am no expert on scumbag-ology, but this one does not even seem hard to me. People buy cars infrequently; trying to get repeat business is low on the saleman's list. Especially at the individual level rather than the dealer level; what are the odds that you're going to buy your next car from not only the same sales guy, but also the same dealer? And with that possible even 5 years off, what is that worth? Meanwhile commission is a high % of their comp. If the salseguy can increase his odds of a sale by lying, there isn't much to stop him on the other side of that mental equation.

Kid Dynamite said...

John,

It is indeed amazing that, even given the proliferation of information about pricing on the internet, the car dealers manage tp perpetuate their "salesmanship." and that's the answer to the question - by the way - the answer to "how do they manage to do this?"

they are the slickest of slick salesmen. kudos to them. I don't necessarily mean that in a bad way.

My wife bought her car in 1999. She used Autobytel - a website where you put in what you want, and local dealers get back to you with a price. They compete for your business, kinda what I imagine LendingTree is for loans, judging from their ads.

In 2009, I bought my first car - the old fashioned way: in person, and despite being armed with all the relevant data, the experience was awful. The deal got done, but I was unhappy, and I genuinely believe that the salesman was unhappy (not bullsh1tting me).. as one friend says: "that's how you know the price was right". I plan to buy my next car via Autobytel or similar competition.

ps - I had a similar experience to your failed trade description in the post the first time I tried to buy a condo. It was listed at a certain price. I went to look at it and said "I'll take it. I'll pay that price." THe realtor told me "it doesn't work like that." I, coming from a trading background, was confused. This was 1999 - if it matters. I said "you showed me an asking price. I will pay that asking price. what is the issue?"

"They want to wait another week to see if someone else will pay more"...

jeeeezzzussss...

Peter said...

I can hear what you are saying but it's business...get over it. You aren't powerless - there are many dealers that you can play off against each other for the same car, and then many brands that you can choose outside of that. Don't be upset because you have a strong desire for a particular model but yet you don't want to pay the sticker price. You are the one asking for a 'deal' here...

dearieme said...

The last time we bought a car we were lucky - our previous car had been stolen and that dumped us into a buyers' market. But we inadvertently found a method of determining that we'd bargained the salesman down as far as he could go. Having agreed the price I airily observed that we'd be paying by credit card. The poor chap both blanched and shrieked. He wasn't actor enough to have faked that.

In the end he reluctantly settled for our paying the deposit by credit card and paying the balance by a draft that didn't cost him a card issuer's turn.

We buy cars so rarely that each time I've felt very inexperienced and inexpert. Praying for luck is a strategy.

Anonymous said...

self-selection; think real estate or Glengary Glen Ross

John Hempton said...

The self-selection answer is not the one I wanted to hear...

I want to be able to select scumbags (so I can short sell them). I don't want them to self-select in a way that makes them hard to find.

Anonymous said...

Haha you haven't even reached the worst point in the car buying experience. The on-sell!

My last buying experience involved "I want this now, at this price". Done [already did research].

Lady comes over to do the forms and on-sell. I say to her:

"You have 0% chance of selling me any paint protector or tinted windows. Don't even try, I'm not interested". I was more to-the-point than with the Mormons at my front door yesterday. At least their agenda was sincere (probably).

My wife and I are there. We look like (and were) a young couple about to start a family.

On-sell Lady: "It's not even a choice for me. It's good UV protection for my kids".

Me: Face-palm.
My wife: huh? Ears prick up

Me: "Actually the normal windows already protect from UV".

WHAT A SCUMBAG TACTIC. I should have walked out right there to teach them a lesson. Alas, I put up with her shit and bought the car without any onsell.

Anonymous said...

John,
I know this will not help in your pursuit of short selling scumbags - but believe it or not scumbags are in every industry not just Finance and banking!!! Shock horror!!!
I know I have been ripped off many times from many a tradesperson - plumbing, electrician, mechanic, estate agent, landlord, travel agent....oh dear. Also think about drug cheats in Sport!
This is more about a comment of human nature. That’s why your business model will always succeed. The pursuit of scumbags is like shooting fish in a barrel.

Happy fishing!


This is more about a comment of human nature. Thats why your business model will always suceed.

Mike Hamm said...

Hi,

I bought an audi from fivedock recently, here are some 'tactics' I used.


- Wore the bummiest clothes possible, juxtoposed with just one item of significant value.
- I refused to take a test drive
- I told them I had another dealer that I bought the same model off a few years ago, and I'd probably get a good deal from him.
- We played the good cop bad cop scenario, where Woo acted like I should get it and I said I really don't need a car - I have many people driving me around
- I told the dealer that I'm not buying the car for myself and I'd buy a holden if it wasn't for my sister wanting a nice car
- I told him that flattery doesn't work on me
- When he started offering me extras , I'd told him I'd rather buy shares.

At 10.30 am we found an a4 to our liking, but it was definitely too pricey, looking at the 70k mark. But I thought what the heck let's try a lowball tactic. So I

- pretended to do some sums on my blackberry (I was actually just checking my twitter)
- then I wrote down a very lowball sum of 60,440 and before he could respond we told him we'd go back and to call us before midday if he could match this offer - the reason for the 440 is twofold - it's a confusing number, and it makes it look like I'm professionally bidding for the car; even though it has no significance and it's just purely a random number.
- I proceeded to give him the wrong mobile number (so he purposely can't call me, and get impulsed into a low price to make a deal when I call him back)

We left the dealership and we went and did some rough sums, and realised the maximum we'd commit would be 62,000 - so any price below that was going to be a good deal for my sister.

I called the dealer back at 12.05 and it was pretty obvious by his voice that he was desperate to make a deal. He offered a car without the sat nav, with a RRP of about 66,500 - and said maybe we could get into the ballpark figure of 60,440; he obviously baited us to come back..

We went back and made the offer of 60,440 and the manager said we need to up our offer a tad - so I made a final offer of 61,440 in which they promptly accepted; about 5k lower than the RRP; probably not the best deal; but happy with my amateurish tactics in purchasing.

Anonymous said...

John - Great and very timely post. I have 300,000 miles on my car and dread the thought of replacing it because of the nonsense factor. For searching out scumbags there is no reason to look at the range of all car salesmen. You can narrow your search by focusing on the scum that become the "finance manager" or as the previous poster called it "on-sale". That is the mother lode of scumdom.

RichL said...

1.Dealers behave that way because there are occasional trusting or stupid people who dealers can sell product to at high prices.

2. Costco in the US has an auto program where they provide a fixed semi-fair price for those people unwilling to engage in negotiating with dealers.

3. The way to get a fair price is to either visit or email as many dealers as you can stand, asking for an out the door price on a specific model. I'm in the NY metro area, and visit a dozen dealers in NY-NJ-CT in one day with a spec sheet, and get prices. I'm always respectful of the dealer's time, and make clear that I won't use their low offer to negotiate with another dealer. Low offer gets the business, period. You always learn from the sellers when the discussion isn't confrontational, so the time is well spent.

What occurs is that a few give insult offers, many offer a normal spread, and a few realize that they will only win with a low price and offer accordingly.

Anonymous said...

Ok, so in the interests of complete honesty, here comes my disclaimer: I don't know.

My guess is that it is all about the incentives.

More fundamentally though, why should there be "a" price for something like a car?


You (JH) deal in securities. They are fungible. One little metaphorical piece of paper is the equivalent of any other and so efficient markets get you to a clearing price quickly. Wonderful.


Cars are not like that. My suspicion is that the industry actively goes out of its way to make the value proposition as multi-dimensional as possible. Even if it doesn't, who's to say that the offering, and the circumstances of the offeror, are the same?


I question an assumption hidden in your post that Car Salesmen and shonky Stock Promoters are comparable in their scumbaggery.
If you were to consider it from the point of view of the car salesman, he is faced with a job where day-in and day-out he has to deal with suspicious and sometimes openly hostile members of the public - anonymous individuals who rock up to his workplace and call him a liar. If you had to extend courtesy and integrity to a never-ending stream of people who treated you like that, how long would you last? (Particularly given the reality that there isn't a number equivalent to the market clearing price, despite how much the customers believe it.) How long would you sustain your principles in the face of lost commissions, where those losses were presumably due to irrational behaviour? (And they must have been, because your principles were giving the purchaser the best possible deal.)

In comparison, the stock promoter is engaging in something that is actually and unquestionably fraudulent.


In my view, they are completely different.

Rahul Deodhar said...

I am going to attempt this. But let me tell you it will be a convoluted answer.
First, you have to imagine the entire car business as a network of transactions. The transactions that make money for the car assembler (I refer to Fords, Nissans of the world) are way more upstream at supplier side based on economies of scale achieved in sharing parts etc. (where exactly depends on each assembler). Sales per se does not contribute the differential value and will not dramatically impact margin on the product as other drivers. Hence the recommendation is to reduce sales cost as much as possible. Let sales pay for itself. Invariably that means hiring people without testing their morals and skills.
Second, these types of people can turn against the company as well and fleece them. Hence strong processes are put in place to constrain them from fleecing the company. There is apparent lack of trust between sales person and the company (usually seen at the time cost is audited or controlled by finance people). For the salesperson, the only way to make extra money is to cheat the customer. The incentives are stacked that way.
Third, the incentives of sales person and that of company tie in well - sort of complement each other. Once customer buys the car, she is sort married to it for 4-5 years. That means parts, servicing etc. etc. 5 years of opportunity to milk the customer - long-term fleecing. (ok I can use buzz word like customer lifetime value etc but you get the idea). For salesman the incentives match. He meets the customer once every 5 years and hence has no incentive to strike a long term deal. So short term fleecing happens here.
Fourth, the buyer behaviour is not linked to salesman behaviour. When you buy a car, you buy the brand and particular model. You even have a specific colour in mind. You want a Honda Civic or you want a Toyota Land Cruiser or Specific colour in Mercedes E class etc. You are locked in to a certain extent. The salesman is not.
Fifth, there are few car dealers (hence collusion is easily possible). Further, the game happens within last 3-5% (usually) of the price. So customers give up as attraction of the product is higher than this. Sometimes sales person try to up the game to 10% (when they have done their target for the month/year or are confident of achieving the same).
Sixth, at some points in the year the incentives of customer and car manufacturer match. For example at the end of financial year of the car maker. They want to push volumes and that allows customers to have a good deal. Similarly, slow months align the incentives of customer with those of the sales person.
It is convoluted but this is what I have concluded.

Anonymous said...

It's a two part process.

The first is realizing that most people out there are idiots, statistically speaking.

The second part involves the deeply held belief that it is your god given right to rip them off.

As you have found in the past, a lot of shady deals are built around a very solid foundation of god and his right to other peoples money.

Anonymous said...

I am absolutely certain that there are no crooks, only people who want to be cheated.

Secondly, I see no difference between a car dealer and a fashion designer selling his/her stuff at 1200 percent profit.

Anonymous said...

They not even aware of the fact they are liars and cheaters. You can derive that from the comments in this section too that show clearly that it is accepted as being part of business..
For most (if not all) of them it is a skill of business.
I've been an accountant and tax consultant for over 30 years and the only difference I was able to make is the following.
Good businessmen: when their business is doing fine, they do seem honest (apart from tax issues), but when things get worse they become dishonest too (although most kept doing well).
The poor businessmen were all dishonest and I guess it is a way to survive.
The elite ( a breed apart) are always dishonest.
Far more than half belongs to the poor businessmen and usually you find them in specific sectors like construction, car sales, banking, ... where they can make important transactions with the masses that includes a lot of (equally) incompetent people.

Highterm said...

If you don't mind having a used car, have you tried buying at auction?

When i lived in the UK i always bought low mileage, 1-2 yr old cars at auction. I usually managed to get a bargain compared to what was on offer at the dealers.
Dealers need a margin so when buying at auction they have a figure that they will pay for a car and very rarely exceed that, meaning retail buyers bidding just a little more pick up a cheap car.

I've never had a dud from auction and on many occasions have managed to sell the car on after 2/3 yrs use for more than i paid!

Elf Owl said...

In my mind these people aren't born like this, but trained.

-> A prerequisite is a shaky moral compass to begin with (mostly by seeing immorality at work during your youth)
-> Second you need a crucial 'learning experience'. Someone who takes you by the hand, helps you do immoral stuff and then tells you it doesn't matter
-> The abscence of negative feedback will help to cement a distorted view of right/wrong

And now to your question: how to look for scumbags?

-> Someone's professional history can help. If they had jobs where dishonesty is considered to be a skill (like salesman) that is a risk. Mind you I am not implying that all salespeople are crooks. Many people have a moral compass that keeps functioning well despite incentives to do away with it.
-> Association with a scumbag is a better predictor. Righteous people that by accident got associated with crooks are truly gutted after that experience. It will affect their behaviour after. If you do not see a change in behaviour after, there's a good chance they are 'tainted'.
-> Scumbags will be totally indifferent to criticism and will not react to it. This is unless the criticism is public, in which case they will answer to the negative publicity with a combination of personal attacks, threats (like courtcases) and more lies

anyway, that's what I think.

t said...

Morality is relative. British cricketers think fairly lowly of Australian cricketers for putting an end to walking.

In the same way I'm sure car dealers think they're just playing the game.

Anonymous said...

1) A GTC limit buy order below market is a negotiation. I use them occasionally and don't have any adverse feelings about it.

2) John, you're well-travelled.
In much of the world this type of to-and-fro is the norm. Generalizing: my Turkish, Indian, and Vietnamese-born acquaintances have superior low-ball buying expertise. IMO, we American-born types aren't that adept at negotiation- because we get little everyday practice in a fixed-price world.
Anyway, seems like you're making a cultural criticism that, while valid by AUS norms, doesn't prevail in many other nations.

3) Pricing is a game. View it through game theory.

Anonymous said...

Coincidentally my brother and brother-in-law are both car salesmen. My brother is a genuine scumbag, my brother-in-law is not (I'm not a scumbag either). My brother-in-law says he actually has quite a lot of repeat business from customers as they trust him and he doesn't try and rip them off. I very much doubt my brother has any as he is the typical car salesman. You would definitely short him if you could.

Saby said...

John, you want a way to identify scumbags from this experience. I am afraid, the learnings cant be generalised.
firstly, I agree with Robert on why this business is this way. If a business depends on transient customer base it doesn't make sense for them to invest in long-term customer relationships. Think restaurants near busy stations/airports/bus depots, the appearance will be good but the actual food will be cr*p. if a car dealership tells the truth and is morally upright in other ways, well, it will make low margins and there is anyways no chance of higher volumes (no repeat business, low impact of word of mouth).
say a new salesman joins the business and is morally upright to begin with. he will either become a scumbag or he will leave and go do banking :-) but this is inprobable. The hiring manager knows that to suceed, you need to have a certain profile and he will do his best to select the right kind (scumbag). any other type will not succeed and if hired (type II error) he will be filtered out in short order. In other words, it is darwinian selection based on this particular environment which incentivises bad moral behaviour.
so, unless you want to short all car dealerships (not a good idea) you are barking up the wrong tree, if you are looking to find general rules to filter out scumbags...
my $0.02

Dan Davies said...

John mate, you sound like the kind of guy for whom the Bruce Bueno de Mesquita car purchasing method was designed

http://bigthink.com/ideas/41819

Nick said...

John,
I very much hope they enter the business with good intentions but the competitiveness of the compensation requires them to lie for their commission.

The effectiveness of the lying is easily shown by the lack of a transparent market even with the net.
That may disappear over time but what won't is the effectiveness of the on-sell. Human nature means even when we know someone is a lying scumbag we might be tempted to buy some useless UV protection because they claim it protects our kids. People are suckers.
The phrase "one born every minute" is an understatement and salesmen take full advantage.

In any case John - I thought you worked in finance.
Have you heard of DEPRECIATION???
It's kind of a big deal.

And don't claim - oh we will keep it for 10 years blah, blah, blah.

Buy a 3 year old car - add a warranty if you must - get it serviced at an independent (non-dealer).
You can send me 50% of the THOUSANDS of $$ I have just saved you.

Seriously, only the financially illiterate or absurdly wealthy buy NEW cars.
They are a rip off even when you have knocked the dealers down to the "right" price.

Anonymous said...

Hi John

I've been reading you're blogs, and it's good too see you're still trying to prove your existence.

I see you like to think of yourself as a hedge fund manager a blogger, journalist/report, a private investigator and a whistle blower or anything eles you like puting in you're business cards.

I looked up bronte capital on Bloomberg couldn't find anything do you think you'll ever crack the brw or Forbes 500? u have a lot of opinions like Warren Buffett but  i don't see you on the list? But we all love the digital era.

Surely an amazing hedge fund manager like yourself will know the real margins are done at manufacturing by the manufacturer, not at the dealership level, margin are set by the manufacture. if the car salesman is a scumbag, whats a make phone manufacturer.

People put up just like yourself whatever they want on the blogs. my advice to you John if you're not getting the price that you want buy it off the blog.

If You want $10,000 off a car, you wont get it in a Volkswagen Toyota Mazda or a Honda dealership, because you look like an idiot if you belive and ask for that. You can get $44,000 off  a car but its a 300 hundred thousand dollar car. you should know everything works with percentage markup, after all you're a amazing hedge fund adviser and manager. You went to buy a car John, not jewelry. If he said his $4000 away from the deal his probably right and you're the lier. Problem is you walked in there thinking that you know more then you actually know, made yourself look like a idiot. And by reading your blogs I can tell your a asshole, he most likely didn't want to see you a car.

Regards
M.Z

But What do I Know? said...

To be honest, I found my last car online--my wife told me what kind she wanted, and I went to one of the one-line sites and asked for quotes. Within a few days I had quotes from three dealers. We agreed on a price with the lowest one by email, and then went down and picked it up.

I got emails from the other places for a few weeks, but they stopped asking after that (I can't blame them for that level of persistence.)

Don't know how it works in Australia, but it was fairly painless for us.

Anonymous said...

A million other people share your feelings. Buying a car is universally hated. A few salesmen are made; but in my experience most seem to be born that way. The truth is kind of a blur; they just don't think they are lying or cheating. Well, FWIW, a few suggestions.

Buy used. The price you pay is what's in the advertisement minus 5%. But you have to know about the market for lemons.

Dress shabbily, and show up in an old car. The salespeople will assume they can make their money on the loan, and won't be too careful about the price. Then pay cash. Worked for us.

As others have suggested, go out for bids, and say upfront you won't negotiate. Be prepared to walk. This has been reported to be successful many times.
Rich

Anonymous said...

There are two deal making psychologies in the world.

You have one, take it or leave it, people are lying or telling the truth.

Please stay out of 90% the rest of the world where the normal procedure is to negotiate. Where both side start with a unreasonable price and then negotiate.

Martin said...

Question why buy a car just rent when you need it. A recent research report by RAC Foundation notes that...•The average car is parked at home for 80% of the time, parked elsewhere for 16% of the time and is only on the move for 4% of the time

seems a lot of money to leave patrked at home all the time

Graham said...

After reading The Lucifer Effect, scumbags are a product of their environment. Its depressing to think that circumstance tends to override whatever inherent moral quality a person has. The hidden positive is that actively searching out environments that are conducive to good behavior should ensure you don't fall from grace. The challenge as always is to recognize that everyone (including yourself) has the potential to be a cheating scumbag, and make sure you don't end up in a situation where you lose sight of this, slippery step by step.
Don't be too hard on car sales people, all sales people are put into an impossible position, reconciling selling/embellishing the truth with providing for their families.

(I distinguish between providing a need, such as food and water, and luxury)

Hiigaran said...

http://www.edmunds.com/car-buying/confessions-of-a-car-salesman-pg2.html This article is really good piece of investigative journalism. A car expert goes undercover and works as a salesman for like a month at two different lots.

Sebastien Thomas said...

Are you going to stay with your old car or will you eat the shit sold by the car company and get a new car before the old one breaks ?

najdorf said...

It's all about natural selection in a job where if you don't sell, you don't eat, and if you sell cheap, you make minimum wage. I had a family member work in car sales for a while. She is savvy with numbers and human nature/customer service - someone that you would expect to perform decently if it was possible for honest car salespeople to do so.

Instead, she really struggled to sell any cars, because a high percentage of customers come in just to dick you around if you don't close aggressively. The other salesmen compete very aggressively to get those customers who seem ready to buy. When she did sell a car, she usually made a terrible commission because she would strike a fair deal with the customer. She got out of the business. The crooked people she worked with thrived and are probably still selling cars.

Onlooker said...

I used to think like this when I was younger and naive'. And it still creeps in sometimes. But really, this is just the reality of human nature. Look around the globe and you'll see what a real market of endless bargaining and negotiating looks like.

And if you think that trying to upsell crap on the margin exists only in car sales, I've got a bridge to sell you.

Anonymous said...

John, if Mike Hamm (a few posts above) were running a business, would you want to short it?
(No offence Mike, your post amused me, I just think it adds another dimension to the discussion.)
Regards, Squat Kromera.

Dan said...

So you just asked is it Nature or is it Nurture. Its an old and tired question because it is always and obviously both. Life never comes in neat and tidy either ors, certainly not such grand ones.

But your real question is how to find scumbags. Seems to me you answered your own question:just go to a car dealership. In the case of car salesman, the dealers have done the work for you, so why reinvent the wheel? Undoubtedly you use the same tactics finding scumbags in the stock market, go where THEY go.

Its the same system we use to find anyone, surely you look for tech experts in Silicon Valley, surfing experts on the beach.

I bet you have a long list of places you look for scumbags, and I would LOVE to see it...

Dan

Anonymous said...

I avoid the pain by using a broker I hire - both to find a good price, sometimes to just find the car, and generally to avoid pain.

He explained the business (for mass mfg in the US) like this:
1. The new car business is basically break even at best. Even though the cars may effectively be on consignment, every other dealer of the same brand has the EXACT same stuff - there is no hope of differentiation. (Porsche, Ferrari, etc. are different.)
2. Not only the margins but possibly all of the profit is in the sellons. (PC business can be like this too.)
3. The service department generally makes good money if well run. They *like* warranty service - that means the mfg is paying them a good rate.
4. The USED business is often a big money maker, because there is differentiation. The dealer WON'T be the only one in 100 miles with a new F150. But they often WILL be the only one in 100 miles with a 4 year old blue F150 - so the spread is much larger.

Also, when the whole world thinks all of detroit is going to implode, it's a good time to buy a Ford even if they're not (:-)

Anonymous said...

It may be an Evolutionarily Stable Strategy (ESS).

http://en.wikipedia.org/wiki/Evolutionarily_stable_strategy

ESS potentially explains certain seemingly destructive, self-destructive, and/or parasitical behaviors. You are good at detecting liars, but not everyone is, so this ESS can reproduce.

This would of course mean that car salesmen and stock promoters were born with these traits, and simply self-selected into their slimy careers of choice.

I have no idea whether it's actually true -- just a potential interpretation.

Anonymous said...

My guess is someone is born and or raised that way. And working in certain sectors brings out the worst in these types of people.

Now, how did you miss out on shorting shares of BBG?

What's your opinion on their current situation?

Why would anyone trust the current people running that company to conduct a successful turnaround?

Jeffrey Hildebrand said...

Add Dealer Incentives, gas guzzler taxes, government intervention and even CO2 incentive discounts to the mix and you touch the entire chain of scumbags.

Nice little thought experiment...

Buying used might limit the risk.

Frozen in the North said...

Well, my experience is slightly different. First off, I bought an Audi, and there is very little pricing movement on these cars (I'm also in Canada). I went to two dealers and the price was the same (maybe $200 difference -- on a $70k car). I chose the dealer for his after sales reputation.

BTW I bought a Saturn years ago, the second iteration before it was gutted and made into just another GM brand. Good car, and the sales process was seamless.

David said...

Inner compass or the structure of society? That's above my paygrade to answer.

But about dealerships it's pretty simple.

1) Asymmetric informations (See Akerlof on "Lemons"). You do not know their cost and margins nor the market price as you do in the stock market. Hence you are unaware of how bad a deal you are making opening up the avenue for higher margins.

2) Incentives. Because car companies have outsourced sales to scale quickly and lessen CAPEX we have middle men who employ salesmen on commission. These salesmen have incentives aligned with the car dealerships but not with the car companies nor with the customers because of infrequent or nonrecurrent deals (general case of course some exceptions to be expected).

How to fix this? I think you either have to make a liquid and transparent market platform for car sales or completely integrate the sales process and eliminate commissions. The first would be an extreme version of Google and the second would be Apple. The first is easily scalable, the second can potentially offer better service and brand awareness. Low-end might go all Internet and high-end can live with limited scaling. Will be interesting to follow Tesla who is building its own network as it slowly scales and BMW, Daimler and such who try to follow in a limited fashion while not upsetting their dealerships.

Anonymous said...

Do you really need a new car?

Buy one secondhand from someone you like... Think of it as a secondary market not infiltrated by stock promoters.

You'd be just as irritated if you bought Facebook at a 100 b valuation.

Anonymous said...

Stock Promoters change countries and companies faster than you can blink your eye.

So look for financial publishers who sell stock "stories" to their readers. Then the emails who won't buy their stock picks/newsletters are rented out to stock promoters.

I could name a few financial publishers who do this but you can google them pretty easy. StreetAuthority is a large list. There are tons of lists you can subscribe to...

Anonymous said...

As a group the population of very successful car salesmen includes an unusually high proportion of psychopaths.

That doesn't mean they've killed anybody, it just means they lack empathy and a normal conscience.

The best way to spot them is to meet them. Most people can sense the disconnect between the outward smiles and true inner self. They just seem off somehow.

uair01 said...

In IT-security there's just a good book from our local guru. I can recommend it, it's also applicable to this area of expertise:

http://www.schneier.com/book-lo.html

Liars and Outliers:
Enabling the Trust that Society Needs to Thrive

We don’t demand a background check on the plumber who shows up to fix the leaky sink. We don’t do a chemical analysis on food we eat.

Trust and cooperation are the first problems we had to solve before we could become a social species. In the 21st century, they have become the most important problems we need to solve—again. Our global society has become so large and complex that our traditional trust mechanisms no longer work.

Graham said...

to Martin, who mentioned just rent a car.
I recently did this and it was more depressing than buying a car. Do you get ripped off buying the tank of fuel at the start for fuel you won't use, or desperately search near the drop off point for a convenient petrol station to avoid getting completely bent over on the fill up price. Then you start to get the hard sell on insurances, thank god my credit card covers me so i can just sign the waiver, again though its a real pain, please sign here that you are completely liable for the full replacement costs of the car, talk about scary. Don't even get me started on the process of finding which rental company to use, myriad of options and special deals making it almost impossible to compare, its making me peed off just thinking about it.

Anonymous said...

My family own 8 dealerships in north america. All in small towns. I hope to shed some light on this from the other side.

First, i'm going to assume two things 1) you tried to buy a car in a big city/at a big dealership 2) you were looking at a new car.

1) In big cities and big dealers the sales people do not care about the long term relationship with you. They live for the "up" (daily lot traffic). They only care about the sale and after that its nothing to them. All dealers from big cities are scum. They even treat the small dealers like scum. They try to screw the small dealers just as bad as they screw their customers. One dealer trade we did with a big dealer took the third row out of a car for themselves to keep even though it was suppose to be sold with the car. Finally, most people believe they can save big money by going to a bigger city/big dealer. Thats the biggest lie ever. The cost of a new car is the same at all dealers, you are not saving yourself any money. Keep in mind its trade difference that is the true cost, not how much they write on the paper you are "buying" the car for.

Small city dealers are not like this. The big city tactics don't fly because word of mouth would kill you off before to long. The really smart customers we have drive from a big city to a small town dealer because they realize this. We can't sell lemons, can't screw people, and can't provide shitty service. If we did, we'd be out of business quickly.

2)If you are looking at a high end luxury car there maybe 4k markup in the car. In one of our stores right now we have a new van on the lot, total mark up is $128 (yeah we're really screwing the customer right?).

Were you looking at info online that was current and up to date? You could be looking at info for when rebates were a lot higher. We see this all the time. Customer remember when you could get 15k off a truck when GM and chrysler were about to bite the dust, gas was $4+, and they had way to much inventory. Today each brand has learned not to beat itself out of business. No more huge rebates (a huge rebate is now $2k), no more rental cars, fleet cars, and loaner cars that get sold used with 10-20k miles, 1 yr old, and $10k cheaper. They've learned their lesson and those days are gone.

But then I have to ask the question if you're the type of person that if they like the offer price you buy. There is the manufacturers sticker on every new car, has to be there legally. If you didn't like it why didn't you walk away? Who cares if the dealer makes money off you? Isn't that what you do in the market every day? Don't you want them to make money so they can be around to service your purchase correctly in the future?

But you also have to ask, have you ever worked at a dealership before? Have you ever worked with the retail public? If you have you know how your customers try to screw you too. Just last week we gave a free loaner to a service customer. As she backed out of the parking stall she hit one of our popular new cars causing 7k damage to the two cars. Guess what her reaction was? "This is your fault, there is a blind spot in your loaner car." And you think the dealer is the A-hole? Maybe, just maybe, if customers didn't treat us like the a-hole, dealerships wouldn't have to act like an a-hole also. Not saying that it works that way all the time, but you'd be surprised if you went to a smaller dealer and were honest and open that you'd probably run into some nice people that would bend over backward to earn your business in an honest way.

Citizen AllenM said...

A very interesting discussion showing your blindspots.

Cars, like everything else are a purchase you may or may not bother to negotiate.

Let me relate the experience I just had selling four vehicles for an estate sale last weekend. One pile of junk- one very collectible international scout (not running), one restoration ready truck, and one modern vehicle.

I sold them all subject to a buy-it now price on craigslist- absolute sale to highest bidder at the end of the estate sale- cash paid and you remove.

The modern vehicle I priced 12% under Kelly BB, and it sold instantly.

The others went to end, and generated very little auction action, to my surprise. Too many assumed I was not honest in running the auction. As a result, I sold the restorable truck for about half price to a friend- who was shocked that no one else bid. I sold the collectible for about half to a guy who had driven down 20 miles to look at it, spent an hour checking it out, and was there for the auction. His competition was an email bid that was sort of incompetent.

After the auction, the winners all managed to get everything out of the yard the next day, helped each other, and in general were a very good bunch.

The next two days I had emails, texts, and calls assuming that I would not have sold them so cheap- because people are used to dishonest actors.

They were shocked, and in one case was indignant about me sticking to the announced terms of sale.

You need to understand- as is mentioned above- how many cheat on both sides of the transactions.

Dishonesty is rife in business, which makes being honest a challenge in this world.

Anonymous said...

John,

there are people who are natural scumbags (patological psychopaths), and they are actually reasonably spottable if you can talk to them more than once - and very trackeable (due to the condition being patological).

The there are what I'd call opportunistic scumbags. That is people who could be under different conditions reasonably decent, but a) found that being scumbag pays and usually b) managed to invent a nice explanation for themselves re what they are doing is actually ok. Often they are "scumbag apprentices" - not of specific scumbag, but of "scumbag industry" - which is self-selecting (as an acquitance of mine in Melbourne told me when he tried his hand at being a real estate agent - "I couldn't lie well enough to keep with the pros").

So, if you were to go for scumbag detection tool, I'd say:
- check for patological psychopaths - although you might find that a lot of large company CEOs exhibit the symptoms, which I suspect is still a short opportunity but a large ship is harder to hole than small/medium;
- check for scumbag "apprentice", i.e. people indoctrinated by an identified scumbag;

Anonymous said...

You are obviously frustrated but I think all this is unnecessary.

Firstly, difficult to arrive at fair value is here. If you really didn't want to haggle on the price, you could have just said "give me one quote as I don't like negotiating and move on". Why did you go back with a price?

Secondly, you should not be equating everything with financial markets. This is real world, he is a sales guy and he is necessary not just for deciding the price but for the company but also for you.

What he is doing is just fair. Saying that "at that price he would be making a loss" just seems to me a polite way of saying that he does not want to sell you the car at that price.

He obviously makes a commission from sales, so it is in his interest to sell than not.


The problem I think could be that you already like that car, and there is a price that you are willing to pay for it but salesman knows better and is asking for your price + 5%. That normally the tolerance zone. If I buy a car once in 5 years, wont I get one that I really like?

If you can spot a liar and you see one here, be a big boy and go back to him and negotiate with him. You cant trade people for computer screens, you got to do these things once in a while.

Anonymous said...

“Our suspicions of others are aroused by knowledge of ourselves.” (source unknown)

Anonymous said...

John,

I suspect being a car dealer is, like most industries in a free market, one where the rules of survival of the fittest play out, and jungle forces prevail.

It is very likely the case that slimball negotiation tactics, including outright lying, end up closing more sales and generating more sales commissions, than "straight up" tactics.

You are not the typical joe blogs car buyers. You are unusually savvy and able to spot and call B/S. Most people probably aren't, and many will fall for the "we will lose $4,000 on this" line.

And as a car dealer, maybe you're better off making one car sales and earning at $10k margin than making two with a $3k margin.

So it's not a nature or nurtue issue. The honest car dealers aren't there because they couldn't pull their quota.

Probably sad but true.

Cheers,
LT

Ben Hyde said...

Discriminatory or value pricing is an element of any transaction. There is a space between the value the customer perceives he will obtain from the product and the marginal cost for the seller to obtain it. As long as the gap is positive a deal can presumably be struck anyplace in the gap, and both edges and both parties perceptions of them are amazingly flexible.

Some of the literature on this kind of thing, all of which is targeted as the sellers, talks about the hidden price; i.e. the price the damn customer is willing to pay and which he refuses to tell the seller. Imagine what a slimeball the car salesman thinks you are because your not willing to admit how insensitive to price you actually on this particular transaction. You don't care much about the price, you care about the respect.

A long laundry list of things contribute to the probability of discriminatory pricing. How locked in is the user after the first transaction. How much repeat business there is. How commoditized the market is. How quickly the products go out of style. How large the transaction is. And, that is only the tip of the iceberg. This list is so long that in most businesses must engage in the this kind of slime ball behavior. In effect this is where the pricing power of a firm is most manifest and failing to leverage your pricing power will kill you another producer will.

The hardest part, for seller, is puzzling out what the buyer is willing to pay. Is he in a hurry? Is he spending his money or somebody else's? (I've had appliance salemen convinced I was the building super - at which point they offered me a gift card rather than a discount.) Is he a fool. These are no different than the problems a buy has figuring out what the qualities of the product he's buying really are.

If there is lots of room and ambiguity in the cost-value gap then the selling firm is well advised to add more labor who's job is to discover the hidden price; and the more tedious closing a transaction becomes. Some buyers and sellers enjoy this tedium.

Technology and marketing have expanded tremendously the number of transactions that can be made more tedious. I just bought a 700$ list price item for 400$ by using a sale, a coupon, a web site that kicks back 2.5%, a free delivery coupon, and gift card I bought from a gift card reseller. All of these are tedious and they all exist as a way for the seller to force me to reveal what I'm will to pay. By proving that I'm aware of these methods I prove I am price sensitive and by going thru the tedious process of using them I prove I'm worthy of thier discounting the goods.

I love your rule of thumb: if slimeballs then opportunity-to-short maybe be nearby. But I think you maybe to quick to draw on the precondition in this case. Some, many, most? markets expend a tremendous amount of calories on just this kind of thing. Eliminating it is hard; and in many cases when you think you've found a market where it's not prevalent your need to ponder if maybe somebody has pricing power and you can see it yet.

Gosh this comment got out of control, sorry about that.

Anonymous said...

I wanted to buy a VW Golf TDI Blue Motion. I went to my local VW dealer and said as much. I knew roughly what it should be. But the company which owns the concession (also the Audi Skoda and others in my and nearby regions) is ODIOUS. I said I want it, will pay cash, and that they hgave one chance to make their most competitive offer, and if its good I will buy it then and there. When the salesman came back, it was NOT with a price, but wibble-wabble still trying to figure out what I will pay, rather than where he will offer. F*Ck that! I got my wife a new Merc A190 2.0 CDI CVT for EURO 21,000 from a guy who bought 100 of excess stock from the Italian Dealer netork. Zero KM. Only downside was that the matriculation date left 14mo on warranty and the manual was in Italian.

My other car (Volvo V70) I bought in April 2009 which was a fine time to buy a car. I would be surprised if I paid above their operating cost. Sure, I took the colour and options that were around, but I am not car-proud...just parsimonious...

--Cassandra

Anonymous said...

I think it is indeed self selection. It is an industry characterized by information asymmetry, opportunity for salesmen to make good commissions without much technical or educational qualifications and relatively little regulation. I do believe that the asymmetry is reducing (at least in the US), there is plenty of competition, and car buying has become a less horrendous experience over the years.

So how can you benefit from self-selection in your business? You could start a stock promotion scheme yourself and find out the kind of people it attracts.

Eric Titus said...

Great comment from Ben Hyde. I'd also point out that the "single price" in finance is actually something of an illusion--the difference between the buyer's and seller's price becomes more noticeable in less liquid markets (such as startups negotiating with VCs about the proper valuation of their equity, or non-auction art transactions). In sympathy with the salesperson, you are clearly willing to pay above your negotiating price for the car. Really what you want is to feel that you got a good deal--or maybe even to feel that you "won" the negotiation. In this case, you might not have been able to come to an agreement--if the dealer was unwilling to sell for less than $4k more and you were unwilling to pay the price. It's not a case of anyone being a scumbag, it's just basic negotiating.

That said, it seems possible that the dealer was lying about you being substantially under the break even point. That would certainly be an underhanded move, but maybe this deal just wasn't going to happen. It does seem that the incentives are for the salesman to try to rip you off--would you be willing to pay more just because the dealer played it straight? Most people are just looking for the best price they can, and many are probably willing to tell the dealer some "white lies" to get there.

I am living in NYC, so I have more experience buying bikes than cars, but if a salesperson is knowledgeable and points me to a bike that feels right, I'd be more likely to be "upsold" on useful accessories rather than getting them on Amazon. One of the benefits of being middle class is that you can pay a little extra for good service or selection. Likewise, I'll get books at a nearby independent bookstore without checking whether they are on sale on Amazon. I almost only shop at independent stores because I feel that an actual person is benefiting--I'm much more aggressive if I'm dealing with a chain or business.

One last note is that the reason you short sell liars/scumbags is because you have more insight into their business than the average investor. It's not the lying that's a clear sign (else you'd be shorting Murdoch/most big banks). Even if this car dealer lied to you, the main mark against his business model is that he's not as cheap as other dealers.

Anonymous said...

John,

I have thought about this question a lot during my 25 year business career. Normal nice friendly men who's company you would probably enjoy at a neighborhood BBQ or a round of golf, make ends meet at work by being scumbags- ripping people off, not paying their bills on time or in full or at all, lying on a daily basis to customers or dogging it at work.. My theory of why they do this is 1) They are intellectually lazy and/or 2) they have no other game. That is the only edge they have, the only way their lazy ass is going to make money and 3) they are so far past the point of caring it's comical. Incidentally although you can find scumbags in all occupations, my personal belief is the insurance industry has the highest scumbag percentage. I also am blown away how parents will befriend known scumbag parents of kids on the same sports team as their kids team without thinking twice. Just my observations

West said...

Kid D,

" as one friend says: "that's how you know the price was right"."

He is absolutely right. A car salesman's job is to have you walk away with a new car convinced that you got a great deal - and have himself walk away convinced that he made a great profit.

If neither of you were happy you probably did get a fair price.

Just went through the process myself and I cannot begin to describe my white-hot hate for the pricks who get off on lying to and misleading people for a living.

Milton Friedman might have something to say about how such dynamics help the market find the true value of a commodity, and I admit that there may be a point to that - but that does not make the process any less demeaning, insulting, and non-productive.

Anonymous said...

Remember that the manager is a veteran salesman, he knows how to work both customers and employees. From my experience in trying a few commission-based sales jobs they play nice at the new employee orientation, but when sales disappoint they urge you to try a few mildly questionable tricks and off we roll down the slippery slope.

Anonymous said...

A carpenter goes to the bar after work and talks about his good handy work. An economist talks about allocating capital correctly. A salesman, after a good day, brags about having sold ice to an Eskimo. They don't feel good about themselves unless they have misallocated resources! They are driven by utterly different motivations from normal people. Wonder why the telephone sales guy doesn't get off the phone - and ring somebody that is more likely to buy- when you shout at him? He wants to break you, so he has a story to brag about.
Wonder why they don't seem to aim their calls at people that are more likely to buy the product, like single women when selling security devices? They aren't motivated by money per se.
Wondered why a real estate agent walks away from selling your house for less then the full commission, even though you know he's making a tonne? He doesn't care about the money he wants to gut you.

CurmudgeonlyTroll said...

As a value guy, buying used from a private party is the better deal. Hard to argue the first 3 years of a car's life are half the value. I'll take a 3 year old BMW 7 series over a new 5 series.

worst case, you can always do what these guys did.
http://i.imgur.com/ZlOae.jpg

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