Basis, hoarding, and devaluation

Last week a reader wrote in to suggest that I address the topic of saving up miles and points for emergencies, which gave me an excuse to think about two slightly different but related topics. The first is the question of points devaluation, either marginal like the upcoming American AAdvantage devaluation or radical like Southwest's move from fixed-value to revenue-based redemptions. The second is the question of loss of ability to manufacture large quantities of miles and points cheaply, which we had a laugh about on Twitter over the weekend.

Return on investment depends on both basis and sale price

Last month Matt at Saverocity gestured at taking the idea of "basis" from the field of finance and applying it to travel hacking.

If you buy a share of stock for $1, then however much or wildly its price swings your basis in the stock remains the same: the amount you paid for it. This matters because if you buy in at $1 and the price rises to $100, you've made a 9900% return on your original investment, while if you buy in at $50 then at the same sale price, $100, you've only made a 100% return on your investment.

Devaluations are gradual and predictable

For all the wailing and gnashing of teeth whenever an airline or hotel devalues its miles, that process is relatively gradual and relatively predictable.

After all these years, despite everything that's happened in the airline loyalty industry, the 25,000 domestic saver award ticket still exists.

It's absolutely correct to say that award redemptions for international premium cabins have gone up in price by 100% or more over the last decade, and that the airlines, particularly United and American, have imposed additional "stealth" devaluations by severely limiting saver award space, but that's a years-long process that we've become more or less accustomed to.

Increases in basis are sudden and unexpected

Let me tell you a story about basis.

It used to be possible to buy $60,000 worth of PIN-enabled debit cards at a single CVS store location in a single day. You might use a 5% cash back card like the "old" Blue Cash. Or you might use a Hilton HHonors Surpass American Express and earn 6 HHonors points per dollar (drug stores used to be a bonused earning category, since replaced with restaurants).

Then CVS imposed a $5,000 daily limit on the purchase of prepaid cards. Suddenly, the same $60,000 in monthly spend took 12 trips to the drug store. Your basis, in the form of time spent traveling to the drug store, went up 1200% in the blink of an eye.

Today, CVS imposes a $2,000 daily limit, a further 2500% increase in your time basis to manufacture the same $60,000 per month in spend, which now takes 30 trips to the drug store.

Now, time is not the only basis you have in your miles and points. Your cash basis in the same $60,000 in spend hasn't changed, since CVS's activation fees haven't changed. But a 3000% increase in your time basis is a much more serious hit to your return on investment than a 50% devaluation of the value of the miles and points you earn.

When safe returns decrease, investors reach for yield

In some ways this is a good, natural, and clarifying process. When it becomes significantly more difficult to manufacture spend, people manufacture less spend, but better spend. It really may have made sense to manufacture spend with a 2% cash back card when all it took was an online order to the US Mint and a trip to the bank with a trunk full of dollar coins. If limited manufactured spend opportunities is what it takes for travel hackers to manufacture less spend on more lucrative cards, that's generally a good thing.

In other ways, of course, this increases the threat to the remaining methods of manufacturing and, especially, liquidating spend. If previously the diversity of techniques and opportunities kept any given opportunity safe, then fewer opportunities mean a higher concentration of people using any given tool. As those of us shut down by Bluebird and Serve know, increased concentration in a technique makes our corporate benefactors more likely to close down the opportunity and force us into even more expensive avenues.

Earn as many of the most valuable points you can, but don't hoard

All of this brings me back to my reader's question about hoarding miles and points for a rainy day, and my position on hoarding hasn't changed in the slightest since I wrote about it last October.

Hoarding can't and doesn't mean "earning more miles and points than you redeem." Everyone should be earning as many of the most valuable miles and points that they can, since we don't know when the next sudden increase in purchase price, our basis, will come along.

I earn cash back when cash back is the most valuable currency for me to earn, and I earn miles and points when they're the most valuable currency to earn. I basically don't factor future devaluations into my earning decisions, for all the reasons I explained above.

But if hoarding means anything, it must mean paying cash today, instead of points, in order to save your miles and points for a speculative, future higher value redemption. And I never hoard.

Like anyone, I'll maximize the value of my cash and points by booking expensive reservations with points and cheap ones with cash or, more usually, fixed-value rewards currencies. But given a choice between an average revenue rate and average points rate, I'll redeem the points every single time.