“The possessors of wealth can scarcely be indifferent to processes which, nearly or remotely, have been the fertile source of their possessions.” – Charles Babbage
Principles of Wealth #8*
When buying “things,” intelligent wealth builders are careful to consider whether they are appreciating or depreciating assets.
My friend Bernard has done very well in the furniture business, manufacturing his pieces in China and selling them to his retail outlets along the eastern seaboard.
In most respects, Bernard is a modest, self-effacing guy. He’s humble. He never boasts. He has a beautiful home that is not ostentatious. But he does wear very fine watches. And he drives high-end luxury cars.
I’ve asked him about this anomaly. As it turns out, those watches and cars are not, like most luxury products, diminishing assets. They are inventory in a side business that he’s been enjoying privately for most of his adult life.
Bernard makes a six-figure second income with these luxury goods. Through a network of contacts that he’s developed over the years, he regularly buys slightly used cars and a select group of expensive watches, enjoys them for 6 to 12 months, and then resells them. He buys them not from retailers or brokers but from people. From wannabe wealth builders who didn’t understand that, as I explained in Principle of Wealth #7, exchanging cash for such status symbols generally makes you poorer.
Generally, but not always.
There are a few exceptions. What Bernard does is one of them.
Here’s a typical example of how it works:
Hank, a 36-year-old hedge fund manager, makes a $400,000 bonus. He spends $320,000 of it on a brand-new Rolls Royce. Six months later, the stock market takes a dive. And a month after that, his income tax comes due.
Not having set aside cash for Uncle Sam, this foolish young man must sell his almost-brand-new car to pay his tax bill. He puts it on the market for $290,000. A week goes by without a single offer. He lowers the price to $265,000. No response. Desperate, he drops it to $190,000. Still no buyers. Finally, he sees a small ad in the paper: “Selling Your Royce? I’m a Buyer.” Hank calls the number and Bernard offers to buy it that day for $160,000.
“I can’t believe I’m doing this,” Hank says, as he signs over his car to Bernard.
“Call me anytime,” Bernard says. “And by the way, I like that Submariner (Rolex) you’ve got there. Want to sell it?”
“How much will you give me?” Hank says.
“Forty grand in cash.”
“No way,” Hank says. I paid $87,000 for it.”
“No problem,” Bernard says.
A week later, Hank calls him and sells him the watch for $42,500.
Bernard wears the watch and drives the Rolls for the next six months, and then sells them for a total profit of $65,000.
Both Bernard and Hank have enjoyed owning these luxuries. The difference is that, ultimately, Bernard made a profit of $65,000 on them, while Hank lost about $200,000.
Here’s the point: You don’t have to eschew luxury goods to build wealth intelligently. You can enjoy them and sometimes even profit from them if you understand, and take advantage of, the difference between appreciating and depreciating assets.
* In this series of essays, I’m trying to make a book about wealth building that is based on the discoveries and observations I’ve made over the years: What wealth is, what it’s not, how it can be acquired, and how it is usually lost.
This essay and others are available for syndication.
Contact Us for more information.
