Car Straddles
Moontower Munchies #42
Friends,
A smattering of Munchies…
A friend texted me yesterday asking for help evaluating a car lease that sounded really cheap. Details:
A 2024 Audi Q8 e-tron for $519/m and $1500 down
24-month lease
$48,000 residual
He asked me because of my old post Are Car Leases Confusing?
The post is a short explainer that shows why leases are a bit tricky. It includes a spreadsheet that you can duplicate for your own reference. Here’s the short version (the post is actually short but this is really distilled):
The interaction that matters:
There's a tradeoff between the residual and the payments. If the residual value is “high” then the amount of car you are consuming is “low”. You computation of how much car you are consuming is intuitive:
[car price - residual] / [lease term in months]
But…
You are "borrowing" the residual from the bank since you don't own the car. You are charged a rate (“money factor” * 2400) on that amount.
This is the source of the trade-off. A high residual is desirable unless they are burying you on the cost of money.
But remember, a lease is an option to buy. It’s like a call option but if you have been reading Moontower you know a call is a put and a put is a call. You are actually just long a straddle. You own vol. How can you tell?
If the car doesn't decay you buy it, if the car tanks you put it back to them.
I said you’d like a high residual if the cost of money is low, but it does mean you have a lower-value option. The residual acts like the strike price of the option. If it’s much higher than the value of the depreciated car then it’s far out of the money and possibly worthless.
Leases are hard to compare apples-to-apples because the dealer can tinker with:
Selling price
Residual
Lease term and miles per year
Money factor
The spreadsheet is a tool to help you compare. It does not value the option. That requires knowing the distribution of used car prices with X miles on them. This is a problem leasing arms of auto companies have quants working on (one of our close friends is C-level in one of these firms and she’s said that when they get it wrong the cost of the mispriced leases is easily 9 nine figures globally). But comparing the residual to historical depreciation rates will give you some sense if it’s at least reasonable.
Also, auto companies with a lower cost of funding can extend that credit to dealers so whether it’s a good deal to lease or buy varies across manufacturers. Some have a competitive advantage in leasing.
Oh yea, about the Audi with the $71 MSRP…run the numbers through the spreadsheet and you’ll see the price they are effectively offering is $57k.
The dealer apparently has 100 of them and sells 1 a week. [Holy bullwhip effect!]
That reminds me:
Happy holiday shopping!
Loved this short message:
You Need to Practice Being Your Future Self (4 min read)
by Peter Bregman
Excerpt:
“I’m glad it’s helpful, Sanjay,” I said. “But you don’t want me to be merely helpful. You want me to be transformational. And focusing on what’s top of mind for you right now is not going to get us there.”
You see, the reason Sanjay is stuck — and the reason many of us feel that way — is that we focus on what’s present for us at any particular moment.
On the other hand, what most of us want most is to move forward. And, by definition, paying attention to the present keeps us where we are. So, sure, I can help Sanjay be a better “present” Sanjay. But I will have a much greater impact if I help him become a successful “future” Sanjay.
It’s a familiar story: You’re busy all day, working non-stop, multitasking in a misguided attempt to knock a few extra things off your to-do list, and as the day comes to a close, you still haven’t gotten your most important work done.
Being busy is not the same as being productive. It’s the difference between running on a treadmill and running to a destination. They’re both running, but being busy is running in place.
If you want to be productive, the first question you need to ask yourself is: Who do I want to be? Another question is: Where do I want to go? Chances are that the answers to these questions represent growth in some direction. And while you can’t spend all your time pursuing those objectives, you definitely won’t get there if you don’t spend any of your time pursuing them…
Here’s the key: You need to spend time on the future even when there are more important things to do in the present and even when there is no immediately apparent return to your efforts. In other words — and this is the hard part — if you want to be productive, you need to spend time doing things that feel ridiculously unproductive.
I want to expand my writing abilities, so I have started waking up at 5:30 in the morning to write fiction. Unfortunately — and I am not being humble here — I am a terrible fiction writer. So my writing time feels painfully unproductive. I can’t sell it. I can’t use it. I can’t share it. Honestly, I can hardly bear to read it out loud. I have such a long list of things that actually need to get done, it is almost impossible to justify losing sleep in order to do something so unrelated to my present challenges. I know this is how my clients feel when I ask them to put aside their immediate concerns and focus on more distant challenges.
A question I hear a lot is: What about all the things I actually need to get done? Don’t I need to get through my cluttered email box, my pressing conversations, my project plans in order to create space to focus on my future self?
Nope.
That’s a trick your busy self plays on you to keep you away from the scary stuff you’re not yet good at and that isn’t yet productive. Sometimes you need to be irresponsible with your current challenges in order to make real progress on your future self. You have to let the present just sit there, untended. It’s not going away and will never end.
This reminded me of the Kipling quote:
"If you don't get what you want, you either didn't really want it, or you tried to negotiate over the price"
I’ll end with a Moontower testimonial that I’m proud of but only trading nerds will appreciate. A friend attending Cal texted me:
Stay groovy ☮️
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