Originally Posted: 5/31/2011
me ask you a question: Would you rather have $5,000 right now or $5,000 four years from now?
Not really a tough question, I suspect. Money in-hand is tangible and usable; it represents capability. In order for me to convince you to wait for money in the future it has to be more than what you can have today. But how much more? If the offer was $5,000 today or $5,200 in four years I feel pretty confident that you would still reject the deal and opt for today as the payday. The capacity for progress created by having money in hand will trump the promise of a meager future return. What the exact future return needs to be in order to entice someone to take the deal is going to vary from person to person. But barring extreme and pressing financial need most people will eventually agree to wait for a future payday. Assuming you are looking to make some type of investment you need to decide what that number is and then make educated and rational decisions on how to achieve it. Enter the ball python; far from a pet the ball python has long since become one of the world’s many mechanisms of speculative investment.
I have an increasingly long history of trying to analyze the economics of the ball python industry (http://wp1040.hostgator.com/~wabqz20aa5pe/2010/04/on-the-economic-viability-of-ball-python-breeding/). There are times when my contemplations on the topic consume me and I have lamented the pricing of ball pythons on several occasions (here and here). Is it really an arena in which financial prosperity can be obtained? Or is it a money pit, a hobby that pays only part of its way with financial returns, leaving a hefty portion of the ‘profit’ to be paid in less tangible forms such as personal satisfaction and enjoyment? As a person who treats ball pythons as an investment in my financial future I really need to know. If the answer is ‘no’ I need to make some dramatic changes to my approach.
The number one place most people think to invest money is the stock market. It may not always be the best or most lucrative but it is fairly easy to do. How easy? Simply open an investment account, fund it, and then sit back and watch. Investing in mutual funds is almost completely hands-off. You need to keep track of the funds you have selected and adjust course from time-to-time but the day-to-day buy/sell decisions are off-loaded to professionals who do it on your behalf (for a fee). It’s a pretty easy way to invest money. Like many of you I invest in a retirement plan through my employer. I also have a brokerage account, IRA’s and a few mutual fund accounts. Each month money from my bank account simply vanishes into them. Aside from the required attention I must pay to their performance I don’t do anything other than earn the paycheck that feeds them. Pretty simple. How much of a return will these investments earn? I have absolutely no idea. But when I play around with the numbers I always assume that over a long period of time my investments will earn an average of 10% (compounding). Having spent some time around the investment world I have consistently seen 10% used as the variable when speculating future results (please note the emphasis on the word ‘speculating’). And for the purposes of this ball python investment exploration I would like to use that as the baseline against which we measure everything else.
Let’s suppose you have $5,000 and want to invest it in something. Should you invest in ball pythons, gold, diamonds, orange juice or mutual funds? If (and this is a very big ‘if’) we assume that the stock market will provide you with a 10% return during the next four years we can figure out how much your $5K investment today will be worth some 1,500 days from now. Here is the equation:
FV = P • (1+%interest)n
- FV – Future value of your money (how much money will you have at the end of the investment period)
- P – Initial Investment ($5,000 in this example)
- %interest – The return you expect (10% in this example)
- n – the number of years you will leave the entire investment (P) untouched.
- FV = $5000 • (1.1)4
- FV = $7,320.50
This means that at 10% compounding over four years (e.g. you don’t touch the money at all during the investment period) your $5K investment will earn you $2,320.50 before taxes. If you take those profits at the end of the four year investment period we will assume that you will pay a 35% tax on the profits (total tax = $812.18). That will leave you with a net profit of $1,508.33. Now let’s take a moment to ask the initial question again: Would you rather have $5,000 today or a net of $6,508.33 four year from now? Before you answer let me remind you that you won’t have to do any tangible work to make that money. The only thing you will have to do is go without the $5K for four years. Is that $1,508.33 going to be enough of a return?
Please also keep in mind that this calculation assumes that you actually have $5,000 in your hand today. If you borrow the money with interest (credit card) you will have to deduct (from your net profit) the money you pay in interest to the credit card company. I won’t try and present those numbers here but it should go without saying that borrowing $5K at 12% interest so you can invest in something that might pay 10% interest is not going to be very lucrative.
But wait, there is more to consider! At this point we are supposing that we can turn $5,000 into $7,320 in four years. But it is important to remember that $7,320 in four years will not be worth as much as it is today. It is a mistake for you to think about future money using today’s perspectives. The buying power of money is going down. It always has and always will. So what is today’s value of your future earnings? I’m going to make an unscientific guess that across the board we are experiencing about 2% inflation. Please note that I know that the real rate of inflation is a highly political issue. The Consumer Price Index (CPI) suggests that the current rate is just over 1% but other people have compelling arguments that suggest it is practically closer to 8 or 13%. I’m not educated enough on the nuances of the topic to argue it so I’m just going to make up a number that seems plausible but not excessive. If you’re an economist please don’t bother trying to bust my chops on this point. The make-believe I am playing doesn’t determine policy nor is it used to pass laws.
Here is the equation to calculate today’s value of a future return:
CV = FV • (1+%interest)-n
- CV = The current value of a future return
- FV – Future return (e.g. how much will you actually be paid at some point in the future)
- %interest – The amount you will pay in interest (inflation in this case).
- -n – The number of years until you will receive the payment.
So what is that actual $5,000 in your hand today going to be worth in four years?
- CV = $5,000 • (1.02)-4
- CV = $4,619.23
And what is today’s value of the $7,320.50 you might have in four years?
- CV = $7,320.50 • (1.02)-4
- CV = $6,763.01
In four years your original $5,000 is only worth the equivalent of $4,619.23 in today’s money. The $2,320.50 you made in pre-tax profit is only worth the equivalent of $2,143.78 today. So just what does this all mean? It means that without accounting for the ever-decreasing value of money you can’t make a direct apples-to-apples comparison of money that you have in your hand today with money you might have in your hand at some point in the future. Stick with me because this is important. You have to understand the future value of money in a way that is meaningful to you today. This is called “net present value”. Getting $1,500 today is not the same as getting $1,500 in the future. In order to understand the future value of money you have to be able to look at it from today’s perspective. The after-tax value of your future profit (four years from now) is worth only $1,393.46 in today’s dollars.
And now I can ask the question one final time, in a slightly different, yet much more meaningful, way. Would you rather have $5,000 today or today’s equivalent of $6,393.46 in four years? Now we have a meaningful comparison of money across time. If the stock market can actually produce a 10% return over a four year period your $5,000 investment will yield an effective profit of $1,393.46 (taking taxes and inflation into account). At this point you are either seeing the light or bleeding from the ears.
Ok. The baseline is set: $5K invested. Fours years of waiting. Net profit of about $1,400 (in today’s money). What about taking that $5K and investing it in ball pythons instead? Can that investment provide a better potential return?
The calculations for a snake breeding project are not quite as simple as putting money into a mutual fund. There are a lot of moving parts that need to be considered. Investing in the stock market comes with many unknowns. Investing in ball pythons has just as many, if not more. On the Scale of Risk an investment in ball pythons is arguably more risky than the stock market but not quite as wasteful as buying lottery tickets. The benefit to this is that increased risk should bring greater potential for reward. The risk versus reward theme is a constant. The bigger the bet, the bigger the gain. Or, if things don’t go well, the bigger the loss. I have said it many times: breeding ball pythons for profit is a game of calculated chance. No matter how well you control the variables the end game is usually nothing less than a toss of the dice. How many females lay how many eggs? How well did you do on the odds and are the babies the “right” gender? None of these things are under your control. And that’s not too unlike the stock market; technology stocks can tank, there could be another accounting scandal or that pharmaceutical company you invested in could have its most profitable product recalled because it kills more people than it cures. Not matter the mechanism, investment is full of risks you can’t completely control. So is the profit potential when breeding ball pythons worth the risk? That’s the question.
What are the moving parts that need to be considered in an evaluation of a ball python investment? They include (but are not limited to):
- Will there be any startup costs? This includes caging, water bowls, hides, room preparation, etc. Many of these costs are, for the most part, one-time costs. If you buy quality cages today they should still be serving you well in 10 years.
- The initial (and continued) investment in animals.
- The costs associated with raising animals to an appropriate breeding size. This mainly includes food and environmental necessities (heat, cleaning supplies, etc.) and, rarely, vet bills.
- Your time. How many hours per week will you spend taking care of your investment? How much do you get paid to do it? For most of us, for-profit breeders included, that answer is close to zero; we don’t pay ourselves to take care of our snake collection. We rationalize this decision by telling ourselves that our payday will come in the future, when babies are hatched and sold. One way or another you are expecting to get paid for the time you spend. But by excluding the value of your time you are artificially skewing the numbers to a more positive outcome. At the very least this is a healthy dose of denial. Companies can’t calculate their profits without accounting for the cost of labor. Would you go to work every day at your “real job” for no paycheck? If this reptile thing you are doing is a business why do the hours spent working on it count differently? It’s OK for you to defer your pay. I did it for a few years when I started my IT business. All I’m saying is that you need to account for it as you do. It’s part of the real cost of being in business.
- Market value depreciation. Ball python prices are both fickle and arbitrary. They frequently fall very fast. It can be depressing. Do not look at the animal’s value today and use that as a measure of your profits tomorrow. You will be very disappointed if you do. For the purposes of our discussion we will assume that co-dominant morphs lose 45% of their value each year. And we will assume that simple recessive animals lose 30% of theirs. This can be quite variable from one morph to the next but the numbers I have seen over the years (despite making me sick to my stomach) suggest this is not unrealistic.
It is impossible to account for every eventuality when considering ball pythons as an investment. This fact alone may make it unsavory for some people. I am reasonably confident that most people who take time to read this really want ball pythons to be an excellent investment. I know I do. But I endeavor to be pragmatic on the topic so I can make the most responsible investments. I am, after all, no longer in this because it is a hobby. These snakes need to pay for a good portion of my future. Can they do that? If not, I need to direct my investment dollars in another direction and let this whole snake breeding thing fall back into the category of ‘leisurely hobby’.
The first thing we need to do is invest our $5,000 in some snakes. To keep things focused on the animals we will assume that the appropriate environment has already been established. Cages, water bowls, etc. have already been acquired and we don’t need to dip into our investment capital for these things.
Here is what we buy:
- 0.3 Normal Adult Females @ $125 each
- 2.0 Visual Males (Single Gene, Simple Recessive) @ $850 each
- 0.3 100% Het Females @ $500 each
- 0.2 Visual Females (Single Gene, Simple Recessive) @ $1,100 each
Total value of investment: $5,700. Whoops! We already blew the budget. But we’ll assume we got a discount on the whole package and our total price was $5,000. Sweet.
With the exception of the adult normal females all of these are current year (hatchling) snakes. Here are some general assumptions we will make about this group of animals:
- The 2.0 males will be big enough to breed the following breeding season. This is why we invested in the normal females. They are an affordable way to get some production early in the investment period and the sale of that production will help offset the cost of raising the others.
- We also assume that two of the heterozygous females and one of the visual females will be ready to breed in 18-20 months. The remaining het and visual female will require an additional year before achieving a good breeding size. This is a relatively safe thing to assume. Not all females get up to size in 18 months but some do. It is not unusual for females to take upwards of 36 months to get up to size.
- Every female of breeding size will not lay eggs every year. Most breeders will agree that in any given breeding season you should expect only 50-70% of your females to lay eggs.
The animals are purchased in May of Year One. Beginning in November of Year One the males are bred to the 0.3 normal females. Breeding continues through late February.
In June of Year Two (13 months after the initial investment) two of the three females lay a total of 12 eggs. In late August 5.6 hets hatch.
For completely arbitrary reasons the price of simple recessive animals drops by approximately 1/3 each year. Using the value of the animals in the previous year as a reference we can speculate that the value of the heterozygous animals one year later will be:
- Male Hets: $70, down from $100 the previous season.
- Female Hets: $350, down from $500 the previous season.
- Male Visuals: $600, down from $850 the previous season.
- Female Visuals: $775, down from $1,100 the previous season.
The total value of our production in Year Two (all of which we will sell) is:
- 5.0 Male Hets @ $70 each = $350
- 0.6 Female Hets @$350 each = $2,100
Because we acquired our initial stock at a 10% discount we will assume that we also sold your production at a reasonable 10% discount. The value of our Year Two production is ($350+$2,100) – 10% = $2,205. The hatchlings were in our possession for a total of ten weeks before being sold. They were fed twice weekly during that time. Subtract the first 10-14 days for their first shed and subtract two additional weeks when they were again in shed and we were feeding them for a total of six weeks. That works out to ($.90 x 2) x 11 animals for six weeks. By the time they are sold we will have spent approximately $120 feeding them. Subtract this from your total and your net for Year Two production is $2,085. As a reminder, that $2,085 is not the same as $2,085 today. The net present value of that $2,085 you will earn in one year is $2,024.
Now let’s jump forward to the tail end of Year Three. This season you got eggs from one normal female (7 eggs), one of your young het females (6 eggs) and one of the visual females (5 eggs).
- From the normal female you hatch 3.3 hets (one egg went bad during incubation)
- From the het female you hatch 2.1 visuals and 1.2 100% hets
- From the visual female you hatch 2.3 visuals.
- Total production: 4.5 hets, 4.4 visuals
Prices at the end of Year Three are as follows:
- Male Hets: $50, down from $70 the previous season.
- Female Hets: $250, down from $350 the previous season.
- Male Visuals: $425, down from $600 the previous season.
- Female Visuals: $550, down from $775 the previous season.
The value of your Year Three production:
- 4.0 hets: 4 * $50 = $200
- 0.5 hets: 5 *$350 = $1,750
- 4.0 visuals: 4 * $600 = $2,400
- 0.4 visuals: 4 * 775 = $3,100
- Total production value: $7,450
In Year Three we will again assume that you sell your production at a reasonable 10% discount. This drops your gross to $6,705. Using the same sales time line as the previous season (with a slight increase in rodent prices), hatchling feeding costs for Year Three are: ($.95 x 2) x 17 = $193.80. Subtracting this from your Year Three production gross leaves $6,511. The net present value of that $6,511 is $6,137.
Finally let’s jump to the end of Year 4.
This season you got eggs from two normal females (11 eggs), two of your het females (12 eggs) and both of the visual females (11 eggs).
- From the normal females you hatch 7.4 hets
- From the het females you hatch 1.3 visuals and 3.5 100% hets
- From the visual females you hatch 7.4 visuals.
- Total production: 10.9 hets, 8.7 visuals
Prices at the end of Year Four are as follows:
- Male Hets: $35, down from $50 the previous season.
- Female Hets: $175, down from $250 the previous season.
- Male Visuals: $300, down from $425 the previous season.
- Female Visuals: $375, down from $550 the previous season.
The value of your Year Four production:
- 10.0 hets: 10 * $35 = $350
- 0.9 hets: 9 * $175 = $1,575
- 8.0 visuals: 8 * $300 = $2,400
- 0.7 visuals: 7 * $375 = $2,625
- Total Year Four production value: $6,950
In Year Four we will again assume that you sell your production at a reasonable 10% discount. This drops your gross to $6,255. Using the same sales time line as the previous season, hatchling feeding costs for Year Four are: ($.95 x 2) x 34 = $408.00. Subtracting this from your Year Three production gross leaves $5,847. The net present value of that $5,847 is $5,402.
At the end of three full breeding seasons (which will put you into year four on the calendar) you will have earned (expressed using Net Present Value):
- Year Two: $2,024
- Year Three: $6,137
- Year Four: $5,402
- Total: $13,563
After subtracting your initial $5,000 investment you have a profit (still expressed in Net Present Value) of $8,563. Well that looks pretty nice but don’t start grinning just yet. You need to subtract your expenses, the biggest of which is your rodent bill for your adult breeders. If you buy rats at an average of $1.30/rat I estimate the bill to feed ten ball pythons for three years is about $1,600. Subtract that from your profits and you have now netted $6,963.
A few more estimated expenses that were incurred during the multi-year process:
- Mulch/Bedding: $487
- Electricity: $720
- PayPal/Credit Card fees: $406 (assumes 1/2 of the $13,563 was payments via credit card or PayPal at 3%)
- Misc supplies: $300
After factoring those into the equation our profit is down to $5,050. That’s not bad, really. We are still $3,657 ahead of the comparatively meager $1,393 we earned in our mutual fund. But don’t forget what is missing:
- Taxes: At 35% your $13,563 would be chopped by $4,747, leaving you with a total initial profit of $8,816. Important Note: There would be plenty of deductions that would push that number back up, of course.
- Caging: We didn’t budget the cost of caging into these calculations; we assumed it was already there. If that isn’t true you could quickly see your profitability drop below zero.
- Your Time: Invest in a mutual fund and make $1,393 while doing almost nothing for four years. Or bust your butt in the reptile business and make $5,050. You worked a lot harder for the return. The time you spent has financial value, doesn’t it? Had you been paying someone to do this all along how much would you have spent in payroll? Even if you spent a lowly 8 hours per week taking care of your animals (a low number, I think) and paid $10/hr you would have spent $4,160/year in payroll. Actual payroll over the total investment period would approach $15,000 …more than the total amount earned. Every business owner knows that payroll is the single biggest bill that has to be paid. This also helps us understand why we don’t pay ourselves for the time we spend tending to our animals.
- Selling Difficulty: I generously assumed that you would quickly sell your production. If your babies spend more time on the rack you could easily add a few hundred more dollars to your rodent bill.
- Marketing Costs: This includes fees to sell using on-line classified sites, web site hosting, trade show table fees, display cases, etc. All of these costs could add up to a lot over a four-year period.
- Catastrophe: The production numbers each season were pretty darn fair. Subtle swings in the odds could radically change the numbers. What would have happened if an animal got sick and needed vet care? You could easily lose them for an entire breeding season (or worse).
One criticism of this particular analysis is that the collection of animals remains stagnant over the investment period. I admit that this is not the normal way ball python breeders do things. Most of us continue to upgrade the quality of our collections. At the end of the first breeding season we could have acquired other multi-gene animals to increasingly work toward making something other than the same stuff year after year. While this may be the more common approach it was not my intention to muddy the waters with additional investment capital being poured into the mix. What I want to know is if an investment in a project can be profitable by itself; no continuous cash infusions needed. Trying to determine profitability when buying new collection members is a topic for another day.
The end analysis in all of this is that ball pythons have the potential to provide a better return that what it typically expected from the stock market. But it’s not a sure thing; nothing is even remotely close to guaranteed. There is a lot of risk and expenses are significant. I remain confident that there is money to be made for some people in this business …but not all of us. Most people simply don’t make plans to be profitable and, as a result, they won’t. I once had a teacher tell me that “failing to plan is planning to fail”. How true…