Money and Time
Judge Giovanni Falcone, whom the Mafia killed in 1992 together with his wife and his bodyguards, once gave a talk at a school. To help the pupils understand why drug trafficking is so hard to fight, he gave them an example. Saviano writes that this example later ended up in the exercise books of hundreds of schoolchildren. “The drug trade is an extraordinarily profitable business. Imagine that a thousand lire invested in it on the first of September becomes a hundred million by the first of August the following year.”
A thousand lire was pocket money for an ice cream. A hundred million was a flat. Eleven months in between. Falcone wanted to frighten the children with the size of the money. I think that, while he was at it, he explained compound interest better than their maths teacher. Pity about the product he chose to explain it with.
This chapter is about how money and time are bound together more tightly than they seem. The same dollar today and a year from now are different dollars. And a business that shows a profit on paper can die because the money arrived a week later than it was needed.
The Wolf’s Thirty Days
Ignazio Lupo, known as the Wolf, ran a chain of grocery shops in New York at the start of the century, which I’ve mentioned already. The business looked solid: wholesale trade, shops, a flagship on Mott Street, property. Then came the panic of 1907, Italians bought less at the Wolf’s high prices, and he himself, as Dash writes, got into the habit of pulling all the cash out of the business to pay for his fine living.
Dash explains what ruined Lupo better than any textbook. In the grocery trade, what matters most is an unbroken flow of money. Suppliers usually demanded payment within thirty days. If in thirty days you haven’t managed to sell the goods and collect the money, you miss a payment, and your credit is cut off. Lupo didn’t manage. When the auditors of his biggest creditors came to Mott Street to check the books, they found the whole chain had assets, stock included, worth one thousand five hundred dollars. The debts came to more than a hundred thousand.
Look: the Wolf had property, he had turnover, he had a reputation the whole neighbourhood feared. What he didn’t have was money in the till on the thirtieth day. That turned out to be enough.
This is called the cash cycle: how much time passes between the moment you pay for the goods and the moment you get paid for them. The longer that stretch, the more money you have to keep in the business to stop it seizing up. A growing business is especially at risk: the more you sell, the more money gets stuck between paying the supplier and being paid by the client. Plenty of people went broke not from losses but from success they had no money to pay for.
Don Vincenzo knew this, even though he didn’t know the word. With the restaurants he agreed on payment once a week, and with the olive mill once a month. The restaurants’ money reached us before it went off to Sicily. Restaurants that wanted to pay once a month got a slightly higher price, and he explained why: you’re using my money for three weeks, and that costs money. Nobody took offence. Everyone understood what he meant.
Money Today, Money Tomorrow
Why does using someone else’s money cost money? Because a dollar today is worth more than a dollar a year from now. Today’s dollar can be put to work, and in a year it will be bigger. And tomorrow’s dollar may never arrive at all.
Pistone describes this from the other side. An undercover FBI agent sometimes had to buy something from the mafiosi, and every time he had to ask his bosses for permission and money. The bosses would think about it for weeks. And the seller, Pistone writes, will wait a couple of days, no problem, but nobody is going to wait a month. Drag it out week after week and you damage your reputation; mess up a couple of times and you’ll be written off as a big talker not worth bothering with. Or taken for something worse.
There you have the time value of money from the seller’s point of view. The man who pays at once gets the better price, the better goods and respect. The man who drags his feet pays for the wait, even if nobody tells him so. When you’re offered money now or more later, work out what “later” costs. Usually more than it seems. And when you ask a client to wait, remember that his time costs money too.
Don’t Spend the Interest
Now for the most remarkable force in money matters—compound interest. That’s when income itself starts bringing in income.
Dominick Napolitano, known as Sonny Black, a captain in the Bonanno family, once handed Pistone five thousand dollars in hundred-dollar bills and sent him to Florida to do some small-time loan-sharking. There was one condition: don’t spend the interest. Everything that came in on top was to be lent out again, until the total capital grew to sixty or eighty thousand. Only then would they split it. Sonny never read a book on compound interest. He just forbade anyone to eat it.
Don’t copy Sonny’s trade; copy his rule. Compound interest works slowly, and then very fast. For the first few years it seems nothing is happening: the income on your income is pennies. After ten years the pennies become noticeable, after twenty they become the main thing. The rule is the same for money in the bank, for a business you plough your profits back into, and for knowledge that builds on itself. The worst thing you can do to compound interest is interrupt it: take the profit out as soon as it appears. The best is to start early and leave it alone.
And one caveat, since we began with Falcone. A promise to double your money in a month is always either a lie or a crime. Saviano describes how, in the early two-thousands, the Neapolitan clans let pensioners, clerks and small shopkeepers invest in shipments of cocaine. A pension of six hundred euros doubled in a month. No guarantees except the middleman’s word. People compared it with the miserable interest at the bank and brought their money. Compound interest that outruns every honest method a hundredfold is never honest. If you’re offered something like that, ask what exactly you’re buying.
What You’re Really Giving Up
One last thing: opportunity cost. Every time you choose one thing, you give up another. The price of your choice is not just what you paid, but also what you could have had by choosing differently.
Saviano recorded a conversation with a teenager who worked for a clan. “At first I worked in a bar,” the boy said, “I got two hundred euros a month, two hundred and fifty with tips, and all I could think about was how to quit… In the System I make three hundred euros a week, and if sales go well there’s a percentage on every ‘brick’ on top… three hundred and fifty, four hundred.”
The boy had worked out his opportunity cost. Every month in the bar cost him more than a thousand euros in money he didn’t earn. The calculation is right, just incomplete. It didn’t include how many years he would spend in prison, or how many years he had left at all. Opportunity cost always has to be counted under every heading, not just the one that jumps out at you.
At the office it’s the same. A man who keeps money in the till “just in case” loses what it would have earned in the business. A man who spends a week on a small order loses the big one he no longer has time for. A capo who checks the invoices himself loses what he could have done as a capo in those hours. Every time, ask yourself: what am I giving up by doing this? Sometimes the answer is “nothing important”. Sometimes it’s an unpleasant surprise.
The Wolf’s trade, by the way, wasn’t ruined by policemen or judges. It was ruined by thirty days.