Making Every Investment Count

Quite recently I had to pay for an overpriced lock. It cost me £8 for a mini luggage lock which would usually cost £3 for two! But the case for spending that sort of money is to secure the valuables in my bag worth more than £600. I would say paying £8 to lower the risk of losing £600 worth of valuables for a 13-hour flight was a one-off discretionary spending.

To put things into perspective, I was only spending 61p (£8/13) an hour for a peace of mind. Furthermore, I could reuse the lock in future. So that's really peanuts - and quite literally that's what M&S charge for a bag of salted peanuts.

However, not everyone would do what I've done. In the UK, spending a little to prevent huge losses is something of a new investment philosophy. The snow that hit the country year on year is a case in point.

Heathrow Airport

The aviation havoc caused by the snow was not something out of the ordinary. Surprisingly the country is still in denial that the snowfall was unusual. In fact, they made asinine statement that it's "the type of snow" that is to blame. They are not to blame. For the sake of argument, let's blame the type of snow then. What about the type of snow in 2007, 2008 and 2009? I rest my case.

In New York for example, the rule of thumb for investment is £640,000 for every inch of snowfall. This year, up to 10inches of snow fell in the country. London did not receive that level of snow but will grind to a halt with just half of that.

Heathrow, the world's busiest airport, is slightly more sensitive. An inch of snow at Heathrow would cripple the airport. In December 2010, six inches of snow fell at Heathrow. This crippled the airport and disrupted services for more than a week. Now, if the airport owner had spent £3.84mil (£640k x 6inches of snow) earlier to address this scenario, then they would have avoided this horror that has also caused them £50mil in losses and £10mil of fees withheld by one of the airliners for business losses due to the closure. That's £60mil in total losses.

In accounting, the value of plant and machineries can be amortised over a realistic period of time, say 5 years, which effectively means that the snowploughs are worthless after five years even though they are more likely to continue service longer than that. This means £3.84mil can be depreciated over a period of 5 years or 20% every year. The airport owner would effectively be paying only £768k every year from 2007 to 2011 to avoid losses of £60mil every year for the same years. That's a total of £300mil against £3.84mil in missed opportunities.

Maybe it's too soon to take account of 2011. Let's see in eleven months time if the UK is really penny wise and pound foolish?