Don't Invest Like a Manhattan Taxi Driver in the Rain
Posted by: Doug Gerlach 1/24/2008 4:42:10 PM

Ever wonder why you can't find a cab when it's raining? Don't let the market's stormy days

In "The Economic Naturalist," Cornell professor Robert Frank explains why you can never find a taxicab in Manhattan when it's raining. In the 15 years I lived in New York City, I came to learn to never expect to be able to hail a cab in bad weather. While it's almost certainly true that more people take cabs on rainy days than on sunny days, there's another factor at play that worsens the taxi shortage.

Most cab drivers don't own their cabs, but instead lease them from a fleet. Since there are relatively fixed costs to the driver for each day, including fuel and the cost of the lease, the driver knows how much he or she needs to earn from fares before turning a profit. Drivers become accustomed to a particular amount that they can take home on a typical day after expenses.

On sunny days, it might take most of a shift before a cabbie reaches this target.

On rainy days, however, lots of Manhattanites want to stay out of the rain. A driver might reach his or her target in a few hours. Having met the goal for the day, the driver decides to go get out of the rain also, and go home early. And so the number of taxicabs on the streets declines significantly.

As Frank points out, this day-to-day approach is not quite the most efficient way for cab drivers to operate -- if they want to minimize the number of hours that they work. Instead of quitting early on rainy days, drivers should stick it out to the end of their shifts, thus making more money per hour than they do on sunny days. Then, on sunny days when fewer people are taking cabs, drivers could shut down early and take the rest of the day off, perhaps even to enjoy some of that New York City sunshine.

In the long run, cab drivers who followed this principle would work fewer hours and make the same amount of money as drivers who went home early on rainy days. While cab driver behavior seems perfectly logical in the short term, it's also easy to understand how the day-to-day focus makes it difficult for them to see the bigger picture.

I think that there's a lesson here for investors, as well. In the first few weeks of 2008, the markets have been rocked by economic fears, and stock prices have dropped. Obviously, a lot of investors are deciding that it's time to get out of the market. But just as it's more beneficial for cabbies to stick around in rainy days when all the other drivers are calling it a day, long-term investors can use this opportunity to search out quality stocks at depressed prices.

Even before this week's panic-selling, plenty of stocks have been reasonably priced. In the February 2008 issue of the Investor Advisory Service (due to be published tomorrow), out of 79 stocks covered by the Service, 69 were at or below their maximum suggested buy price (the price at which the stock could reasonably generate a 15% return with a minimal downside over the next five years, as of January 17, 2008). There are plenty of good stocks out there, many of which are "on sale" because of the irrational nature of the market.

Don't invest like a Manhattan cab driver on a rainy day. Stick with high-quality stocks during inclement weather and you'll be basking in the sunshine before you know it.