The Discretionary Dollar

Why do we buy? Do we buy because we need to use or do we buy because we want to have?

This simple question not always has a simple answer.

Are you spending extra time and money purchasing things you could be borrowing instead? Here are a few things to consider before you hit the store next time.

Benefits of Borrowing:

Test Drive Products for Free
Would you dream of buying a car without a test drive? I know I wouldn’t. A major benefit of borrowing is that you get to try before you buy. And if you do end up needing to purchase this item (perhaps rarer than you may think), you will be informed with hands on experiences on what features you like or don’t like.

Spend less
By borrowing you save the money you would have spent buying that “item”. If you only use an item once a year why have it in your life? Instead, spend your cash on something you frequently use or enjoy. Or sock it away in your favorite mutual fund.

Live With Less
By having less you can maintain and enjoy what you do have more. What’s the use of having everything you might need if it takes you 30 minutes to locate it? You may even spend less on housing by having less. You’ll saving time finding (shopping, researching etc) and maintaining excess stuff as well. Less stuff means less storage.

Already have too much? Shed it and fatten your replacement fund.

Build Stronger Relationships
When you borrow you are asking someone else for help in some form. People generally like to help (especially if it involves none of their time or money). I find when I borrow things from friends I end up seeing them more. As an added benefit, I usually get to talking about what I need the item for. You have a chance to hear ideas or suggestions that may save you time or money when you start your project. And sometimes your friends may even want to help you, which of course will make your project go twice as fast.

Spend More on What You Do Buy
If you only buy what you use frequently and absolutely need, you can guiltlessly spend the extra bucks on it. Chances are you have tested and borrowed this item before so you know exactly what you need. For example, would you rather have every cheap tool possible or real nice tools that you use frequently?

Share if Possible
If you are asking to borrow your friend’s power washer every other week perhaps this item may be worth purchasing. But what if your friend lives next door? Why does every home need a lawn mower when two friendly neighbors could split the cost and share? Evaluate your usage and make sure there are no simple and easy ways to borrow. Tell yourself after you borrow x amount of times you will look into buying. We bought a canoe with a family member and it works great to share it. Half the cost, half the storage, half the maintenance and the same enjoyment.

And when you do really need to buy something use your replacement fund.

Talking Point: What types of items have you borrowed instead of purchasing?

Short Synopsis
This book is about Warren Buffett’s life as an investor and citizen. It details his large deals with background and insight. The book’s focus is mainly on his road to wealth but also gives good insight on Buffett’s character and personal relations.

Purchase on Amazon: Buffett: The Making of an American Capitalist

After reading this well written book I feel to I have a good idea of Warren Buffett’s investment strategy and character. Here are the main points I gleaned from the 400+ pages.

Develop Creative Ways of Generating Income
As a boy Warren developed many small business ideas and ventures. These ventures were essential to allow Warren to save up his bankroll. In 1945 (at age 15) Warren was making $175 per month (about $2,100 in 2009 dollars). Some of his ideas/jobs included:

• Golf ball Collection and Resale
• Paper Route/Magazine Subscriptions
• Pinball/Vending Business
• Rental Income (from 40 Acres of farmland purchased for $1,200)

Use Frugality to Preserve Capital
Every dollar you spend brings you one dollar away from tomorrow’s profit. Warren saved nearly every penny for his investments. By 1950 (age 20) Warren had saved $9,800 from his ventures (about $87,000 in 2009 dollars). He was very frugal, even in his later years. As a Billionaire he drives his same American car, and lives in the same house he did when he was starting out.

Be Your Own Light
It is clear that Warren valued his own personal judgement more than anyone elses. He followed his own morals with unwavering determination. Stop listening for stock tips, and find them on your own. Use your own tools to determine a clear picture of things. Warren was fearless when others were fearful and was skeptical when others were fearless. Warren reads hundreds of annual reports a year to get corporate insight. In some cases he’d talk with executives, company employees or others with detailed knowledge. He would always come to his own conclusion with the data he dug up.

You Don’t Need Money to Make Money
Every penny Buffett earned and saved was without any financial help from family or friends. He used his head to leverage other’s financial means, but never used guilt or charity looking for handouts. Early on he made it clear he wanted to be able to say he did it alone, without financial help. He did however have strong family connections that enabled him to find partners in the beginning. These partners were in it for the money, not because they wanted to help Warren.

Search for Value
Most stocks have no real potential. The skill comes in sifting out all the unimportant stocks. There were times Buffett could not find good stocks to invest in.

Warren’s general strategy was to invest in stocks below value. A stock is below value when it is selling below it’s assets. For example a company is selling for $15 per share, but has $20 per share in assets. There would be value in this stock. Earnings per share is also taken into consideration. Value is not market moods or trend analysis. Beating the market is a fools game if you are using volatility or price fluctuations to do it. Look at the source of the price changes, not the changes themselves.

He was a devoted Benjamin Graham fundamentalist. Grahams book, The Intelligent Investor is a must read for those wanting to learn more about this type of security analysis.

Develop Your Opinion of Value
Once you determine a stock price has value, you then need to determine roughly how much value is there. But it’s just an estimate. Warren once said “But one needn’t value a business too precisely. A basketball coach doesn’t check to see if a prospect is 6’1” or 6’2″, he looks for seven footers.”

Keep Your Ideas for Yourself
Once you find value or have an idea, keep it a secret and don’t advertise it. Many times listening to other’s ideas may be too late. Buffet would hatch his own ideas and guard them. He would even protect them from his wife! In fact he protected them from his investors too. During his first partnership he wouldn’t tell any investors where their money was invested. His ideas were top secret.

Don’t Diversify (in a traditional sense)
As Mark Twain once said “Put all your eggs in one basket and watch it closely”. If Buffet were a poker player, and his hand was a winner, he’d go all in. When he found a prospect he liked, he bought a ton of it. Diversification, as the common investor understands it, was not one of his primary strategies. If you determine there is value in a stock then why just buy a little?

Buy for the Long Hold
Warren’s strategy of picking winners and letting the market eventually bring them to the correct value takes time. This investment strategy usually means long term holding. Many of Buffet’s best investments he never sold. Buffet held onto losers when others would have sold and given up.

Invest with Like Minded Partners
Look for companies that value shareholders, not squander their return. It is crucial to invest with those that have your same outlook. At one point an investor came to Buffet’s office demanding to know where his money was invested (clearly against their partnership agreement). Warren of course said no and promptly cashed him out of partnership. Be picky on who you invest with.

Understand Your Investments (Core Business and Profitability)
Learn about what you invest in. Invest in what you understand. If you don’t understand the business, you won’t be able to understand the company’s value. Study prospects (companies that may have unrealized value). Look at their competitors and at the raw data. Don’t base your decisions on analyst summaries. “Trust your own eyes” as Buffett insisted. Warren had already read hundreds of books by the time he graduated college.

Simply Your Financials
Warren learned the hard way that complication is fruitless. Having a complicated web of companies lead Buffett into a major SEC investigation. Immediately after, he consolidated and merged the companies to simplify things.

Speak Softly And Don’t Make Enemies
Buffett had huge influence in all aspects of his dealings. But he had influence not because he demanded it. It is no doubt that Warren’s charisma and homespun nature got him where he is today. He was direct but not bossy. Others listen more the less he would say.

Should You Read it?
If you have any interest in investing in stocks this book is a must read. Much of conventional stock and investment teachings are challenged by Buffett. You won’t get specific tips and methods on investing, but you will get a broad brushed overview of the methods and strategies of the most successful modern investor. The books is long but is packed full of details and quotes aimed to give you a well rounded picture of Warren Buffet.

Purchase on Amazon: Buffett: The Making of an American Capitalist

So you have now identified a few items to sell for your replacement fund. But how do you turn those items into cash and grow your replacement fund? Here are some ideas.

• Part 1: What is a Replacement Fund?
• Part 2: Funding Your Fund
• Part 3: Cash for Clutter

Pick The Best First
Set yourself up for success and sell your best items first. This means items with the highest profit and that are the easiest to ship or transport. These are usually books, electronics and other consumer goods.

Price to Sell Fast
You have already decided you wouldn’t mind shedding these items, so don’t let price get in the way. It’s easy to get hung up on what a “deal” the buyer is getting. After all, you paid -insert your price here- and it has the -insert some feature here-. The past is the past, so don’t get hung up on the other guy. (Yes, he is probably getting a good deal). Good deals are what drive sales. The fact is, if it wasn’t such a good deal the buyer wouldn’t be knocking at your door. Make your item a great deal and don’t look back.

Advertise a Few Items at a Time
Remember to pace yourself. If you have closets full if items to shed, start with just a few. Less than five is ideal. I know it sounds like a slow start but jumping in head first is a great way to drown. On the other hand if you only start with one item and have no success (it doesn’t sell) you may give up too soon. Start with 3 items or so and test the waters. This way you will not be overwhelmed and will have time to ‘learn the ropes’.

Here are a few methods of selling your stuff:

Amazon.com
Amazon is easy and quick. It is best for consumer electronics, books or other common household items. Amazon requires no technical skills and no customer interaction is necessary. Amazon takes a cut (depends on what you are selling) but also gives you a shipping credit that is typically generous (for books it is usually $4). I have listed books in the evening that all sold before I got up the next morning.

eBay.com
Ebay is best for less common or more unique items. You can set your own price and shipping terms. The downside is that auctions (the traditional way to sell on eBay) take a lot time (a few days). The buyer can also skip out on you forcing you to start the auction all over again. In addition, listing your item takes more technical skill (upload photos, type out specs, formatting etc). You must write your own details and supply your own photos. eBay fees are very reasonable.

Local Craigslist.org
This works great for items that are too expensive or too large to ship (couches, cars, washer/dryers). There are no fees but you will have to post your own photos and description. The downside is that you have to deal with customers. You have to meet them in person to exchange the item for payment. However, I bring smaller items to the office so I don’t have the public coming to my house. You can also meet in your front yard, or at a large parking lot if you really don’t like the idea of someone coming to your home.

Tip: Don’t use the Craig’s list photo upload. Instead, use another service and embed the photos. Craig’s list forces you to upload images that are very small which doesn’t provide the detailed photos most buyers want.

inumbr.com
Are you hesitant about giving your number to strangers? This is a free tool that assigns you a free number that forwards to your cell phone. It’s a anonymous number that you can use for free.

Don’t Negotiate
You may end up lowering your price or accepting a lower price than you want. Swallow your pride and take it. Chances are you aren’t a retail salesperson so don’t pretend you are skilled at it. Take whatever reasonable amount you can bear and say goodbye to one item at a time. By attempting to negotiate you risk getting burnt out and frustrated. And for what? A few extra bucks?

Talking point: What techniques or practices have you found success with when selling your stuff?