Monday, July 19, 2010

Forever Stamps or How I Learned to Stop Worrying and Love Postal Rate Increases

Millburn, New Jersey
19 July 2010


Everyone laughed at me two years ago when I spent $820 to buy 2,000 Forever Stamps. But I'm the one laughing now.

I'd known about Forever Stamps for perhaps three years but was wary of buying them. You buy a stamp today at today's first class rate and it's good forever, no matter how high the first class rate goes. At first glance, a great hedge against one of life's certainties - postal rate increases. It's like death and taxes. Right? Since 1958, the frequency of rate increases has gone from 5 years down to less than two years (1958 was the first increase in 26 years, the current 42 cent rate will be in effect for a mere 20 months). The typical increase used to be a penny, now its at least two cents - that's a 100% increase in the amount of each increase. Given the increases in both the frequency and the amounts of postal rate hikes, Forever Stamps could be one of the greatest inflation hedges since common stocks and home ownership. And even us disabled, retired guys have better things to do than counting stamps, buying small stamps and sticking two or more stamps on every letter to use up our pre-increase stamp supply. Nevertheless, my brilliant analysis seemed to put Forever Stamps into the category of "if it sounds too good to be true, it probably is." After all, for the inflation hedge to work you'd need to buy enough stamps to last through some number of rate increases. What if the spread of electronic communications really does force the Post Office to close it's snail mail services? Let's be real, who would go out and buy a supply of more than one year's worth of stamps? Would you? Would anyone you know, even your friend who owns the business that advertises and ships by mail? Heck no. Only some wacko would go out and do something like that just to beat some hypothetical future rate increase imposed by an agency that some people, many of whom are decidedly not wackos, think is going to disappear.

And so, on May 1, 2008, 12 days before first class rates increased from 41 to 42 cents for the first ounce, I walked into the town Post Office and officially became the town's resident wacko.I asked the clerk if he had Forever Stamps. He said he did and also, on further inquiry, said he did not sell many and could not understand why more people did not use them. Figuring there must be a catch to what seemed, to me, like a great deal, I asked if there was a limit on the number I could buy. He said the limit was whatever amount he had in stock. As it turned out he had a pack of 2,000 stamps (that's 100, 20-stamp strips). And so, I impulsively invested $820 in 2,000 Forever Stamps, knowing that in a mere 12 days my stash would increase in value all the way up to $840. The clerk gave me a look like he wasn't quite sure whether to take my credit card or push the button that brings the Postal Police in to subdue customers who go off the deep end. People waiting on line behind me gave me lots of room when I turned to leave.

Returning home in triumph, I told my Beautiful Wife what I had wrought and, without looking up from her laptop, she said, as lovingly as she could manage between the chortles, "That's nice dear, you now have something to leave the children since you will die before using up the stamps." Now I will admit to making the purchase on impulse without actually calculating my stamp usage. So, for your amusement, here's how the math worked out. Most of my monthly bills are paid electronically and most of my correspondence is by e-mail. As a result, my actual need for stamps has fallen dramatically (which, multiplied by millions of Americans, is probably why the Postal Service needs more rate increases). Being generous, let's say the Beautiful Wife and me use ten stamps a month. Since we regularly spend 4 months a year in Israel, our "US Stamp Usage Year" is only 8 months long. That's 80 stamps a year. Divide 2,000 by 80 and you have enough stamps for 25 years. Given my multiple heart conditions, to say that in 2008 I had a life expectancy of 25 years would be generous.

The next week, the Beautiful Wife was standing on line in the Post Office. The clerk who made the sale was regaling a few people with the story of how some wacko had come in the week before and bought 2,000 Forever Stamps. The Beautiful Wife, always quick to defend her loved ones, shouted out, "That wacko is my husband!" The clerk started to apologize but she cut him off saying I had lost it years before and this purchase was no surprise. She then rushed home to tell me that I had become a town celebrity.

Now, whenever I get the chance, I remind the postal clerk, and everyone else who scoffed at me, that I'm the wacko who loaded up on the Forever Stamps. Only I do it with a note of triumph in my voice. When I first bought these stamps the second person I told about my brilliant idea was my good friend, Allan Sloan, a nationally prominent financial journalist. Allan, who does this for a living, had a jolly time mocking me and pointing out that he had written almost two years earlier that Forever Stamps might be a convenience but were certainly not a better inflation hedge than money market funds, Treasury paper or CDs. Of course, what Allan and everyone else who wrote me off as a wacko overlooked is that past performance really does not predict future results. Today he, like all those people who gave me lots of room at the Post Office, my children and even my Beautiful Wife, are not scoffing quite so loudly (or, more accurately, have found other good reasons to mock me). Why? Throughout the worst financial collapse since the 1930s and a recovery that may take most of the coming decade to return us to where we were before the housing bubble burst and the banks started doing the dead cat bounce, my Forever Stamps have done nothing but increase in value. Come next January 2, when first class rates go up to 46 cents for the first ounce, the value of my remaining stamps will have increased three times, gaining more than 12% (that's an annualized return of roughly 4.4% for the 32 months from May, 2008 through December, 2010). Not exactly pre-bubble bursting day trading profits but slow, steady, reliable and not too shabby under the circumstances. How's your portfolio been doing?

14 comments:

Danny said...

This is great. I posted it on my facebook and even got comments!

Danny said...
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Anonymous said...

Very well written. Thanks for the post.

Anonymous said...
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Anonymous said...

May I suggest that the Forever stamps make wonderful gifts, particularly if you have elderly friends or relatives. You save them a trip to the Post Office and give them something they will almost definitely use. You might even save yourself a shopping trip by slipping a few stamp booklets into a card.

I hope you'll be with us long enough to use all those stamps yourself, but you may get more joy from them by sharing with your loved ones.

jen z said...

Don't even TRY to pretend that you bought the forever stamps for investment purposes. I am 100% certain that you did this with nothing more than "cocktail party stories," both US and Israeli, in mind. I know you too well to let you imply you're a financial genius!

rae said...

Dave -

Congratulations on your Fortune Magazine post!
Two comments:

I prefer the triumphal, gloating ending of the version posted here on your blog to the sheepish, deflated ending of the Fortune version. Editors.

Both Jon and I had to wonder why, having recently gained access to a lifetime-plus supply of Forever Stamps, Liz would need to go back to the post office just a week after your heroic purchase. What attraction could the post office hold for the woman who owns the postage?

David Stolow said...

And what's wrong with cocktail party stories? Truth is the chance to publicly mock a nationally prominent financial writer while not having to hassle buying and using bunches of "little" stamps, is too much to pass up. It did, however, occur to me at the time that the stamps might be a good hedge against postal rate inflation. That's when I told Allan Sloan what I had done and that's when he began mocking me. As for financial acumen, I never have or will make such a claim. When I happen to come out ahead it's either luck or my Financial Advisor. When I lose, it's usually my own fault. Just this once though, I'm both ahead and get a funny story out of it - the perfect investment.

David Stolow said...

Rae - Not to leave you in suspense, Liz and I go to the Post Office to mail packages or over weight or over sized letters. Also, it's a hang out for us retired folks.

Anonymous said...

David J said:

Perhaps you could bundle the stamps into groups of 100, and now that your investment has appreciated, you could take your profits and go buy more stamps. I see a cottage industry in the making.

David Stolow said...

Dave J

Not really. My stamps are currently worth the 44 cents it takes to buy a stamp. No rational person would pay me more than that for them. Yes, selling off stamps at today's price would be taking a profit but if I then turn around and buy more stamps, even Forever Stamps, they will cost exactly what I got on the sale. In other words, a complete waste of time. I bought the stamps so I would never have to buy stamps. So why would I sell the stamps to buy stamps?

Marilynn said...

Dave: An excellent blog post, and Alan's video on the Fortune site is hysterical!

And, although you may not have intended it to be so, it's also very timely: the USPS has just invoked one of the provisions in the most recent reform law (intended to try to save the Post Office from its own foolhardiness) and filed an "exigent case." This means that they can ask for a rate increase above the CPI. While this may seem like pennies to the average first class stamp user, to the publication/catalog/direct mail industry--who move billions of pieces of mail--it's a, well, fortune. That's why hundreds of major mailers have banded together in an unprecedented coalition to try to force Congress to deny the Post Office its greediness, and get them to seriously consider cost cuts and efficiencies instead. If you'd like, you can read more at http://www.minonline.com/news/Affordable-Mail-Alliance-of-Publishers-Forms-to-Fight-USPS-Hikes_14696.html

BTW, now that you have such a cushy margin on your Forever Stamps, you should consider flipping them: if you resold them at 43 cents a piece, you'd still have a decent return, and the buyer would save nearly 10% off the new rate. You could target the heavy mailers, like parents of children going to camp, or people who send those year-end family newsletters. Just think: you might single handedly spawn a whole Forever Stamp after market, which would make people rush out to buy their own cache of Forever Stamps so that they can get in on the action, which might create enough revenue to prevent the USPS' need for an exigent case. Among thousands of people in the mailing industry who have been lobbying and working on this issue for years, YOU may have just figured out how to save the Post Office.

David said...

Mr Stolow,

There is a fundamental flaw in your plan. You write, "Forever Stamps could be one of the greatest inflation hedges," but therein lies the problem. As stated indirectly by commenter Marilynn above, postage stamp rates are pegged to inflation. According to the Postal Accountability and Enhancement Act (2006), postage prices will always stay at or below inflation. So by definition, your stamps are always losing value. [see this Slate article from 5/17/2007]

Furthermore, from 1952-2009, stamp prices have increased at an average rate of 4.825%**. There are many other investment vehicles that could easily beat that mark without undue risk. Heck, bank CD rates outperform that over time. [not right now, of course]

Sorry, unless you follow other commenters' advice and sell the stamps now to capitalize on the arbitrage, you're sitting on an investment that loses value like cash but lacks the flexibility of use.

Note: I'm a finance professor and use this exact situation as a bonus question on my students' midterm exam.

**The crude calculation: a stamp in 1952 was $0.03, a stamp in 2009 was $0.44. Using the future value of a single payment equation, you get 0.44=0.03(1+r)^57. Solving for r (the rate of growth) gives 0.0485.

David Stolow said...

Thank you Professor. I'm sure your math is right. But the problem I've always had with long term statistical analysis is that the results don't apply to my specific investments. Yes, if I'd bought the stamps in 1952 I'd be way behind. But I bought the stamps at the cusp of the Great Recession and I think I'm still ahead. My yield, pathetic as it may be, is still ahead of the CD, Treasury Bill and money market fund rates I could have had over the same period of time. This I attribute, of course, to dumb luck. With the cancellation of the January 2011 rate increase and the inevitable rise of the interest rate curve I expect that at some point in the future my money market accounts will overtake my stamps. Looking on the bright side, however, I'll be able to post a blog about how I held on too long. Which I'll have time to write because I still won't be standing in line to buy make-up rate stamps.