This little piece of tin is now selling for $1M. On NPR this morning they had a story about a cab driver who had purchased a taxi medallion—which gives you the right to pick up fares and drive a proper taxi in New York City—for $215,000 in 2003. He says he can resell it today for $700,000, and two medallions just went for a cool million each. They analysed the returns since 1980, and they were nearly 1000%. As a reference, gold has appreciated only 181% in the same period. That’s crazy. There’s a publicly-traded company called Medallion Financial that loans money to cabbies for these medallions. That’s a tricky business, because most cab drivers are immigrants with no credit history, not-so-great income, and likely without citizenship. So you’ve got risky loans backed by an asset that is assumed to keep appreciating wildly without fail. Sound familiar?
I was thinking about this in the context of business in general, and how attractive these little “no-fail” get-rich niches are (in fact, Medallion Financial’s motto is “from niches to riches”). People get infatuated with this sort of instrument…it’s hard not to. You look at how things are going, the fact that the only time medallion prices went down was after 9/11, and you get excited. It’s the same with any “sure thing” prospect…when you think you can’t lose, you forget about the downside, which is dangerous not only because you’re not calculating risk properly, but you’re not seeing the whole picture, which will screw with anyone’s decision-making process, no matter what. And of course optimism is necessary to do great things, but there’s a difference between optimism and delusion. The latter got us where we are right now, and will be the catalyst for the next bubble/crash cycle as well.