Just because you paid a lot of money for something doesn't mean it's worth anything.
One of the oddest things about personal finances is that we, as human beings, will pay an awful lot of money for something that is almost immediately worthless - or at least worth half its purchase price the moment we buy it.
Cars, of course, are classic example and one that most people have personal experience with - at least after a few decades of living on this planet. You buy a brand-new car, and the moment you sign the papers on it, it's worth about 10% less than what you paid for it. Bring it back to the dealership after two or three years and you'll be lucky to get 2/3 to 3/4 what you paid for it as a trade-in. (That is, of course, assuming that the dealer isn't playing some sort of inflated trade game to get you to think that you're getting more for your old car than it's worth).
After five years, the car is worth about half what you paid for it. And that five years after that, half again, until it diminishes down to scrap value. Maybe decades later, if it's kept preserved - or more than three or four times the purchase price is spent restoring it - it may be worth its original purchase price. Only years after that, it might actually appreciate in value. But generally speaking, cars are pretty shitty investment all the way down the line - even coveted "collector" cars.
After you lived on this planet for a few decades and owned a few cars, you start to realize this is true and a pretty inflexible rule . Things just wear out over time and just not worth as much used as they are new. But there are the things that are in perfectly good condition when used, that are still not worth as much as new. Why is this?
What got me thinking about this was that we were sitting on the porch admiring the sunset and Mark noticed that a small area rug that he inherited from his stepmother was getting wet from some water splashed out of the hot tub. "She paid a lot of money for that rug," Mark said, " it's worth something."
I responded that if it was really worth something why did he place it out on the porch where it was exposed not only to the elements but to dripping chlorinated hot tub water? I think it was at that point he realized that the rug was really not worth very much at all. It was just a fairly ordinary throw rug, and not some priceless antique oriental rug from India.
Yet, this is a trap I see a lot of middle-class people falling into, including myself, my family, and Mark's family. We have what we think are precious Objects d'Art which are really little more than tchotchkes that we accumulate over a lifetime. Maybe they're worth something to us because they have sentimental value, but they aren't worth anything to anyone else, once we are dead and gone.
As an example, Mark has another small throw rug that his grandmother made. She got into hooking rugs for a while and made individual rugs for each one of her grandchildren. They're worth something to Mark because it's a precious gift he got from his late grandmother. But once we're dead and gone, somebody will buy it at a garage sale and use it as a bath mat, no doubt.
That sounds harsh and unsentimental, but it's the reality of the situation. Stripped of the sentimental value, it's just another small area rug, perhaps worth something to someone as a curiosity but little more than that.
But getting back to ordinary, non-sentimental consumer items, consider your typical sofa. You go down to the furniture store on the weekend to buy a new sofa and let's assume you buy good quality made sofa at what is considered a fairly reasonable retail price. You have it delivered or take it home where you put it in your living room and use it for a few years. You're very careful not to spill drinks on it or damage it or mark it in any other way.
After a few years, you're transferred overseas and it's not worth moving the sofa so you decide to sell it. The sofa is in perfect, like-new condition, and is not out of style. Yet when you try to sell it online, or a garage sale, or through the local paper, you find that the price you get for it is less than half what you paid for it only a few years before. Not only that, it's less than half the price the sofa store is selling the same model sofa for brand new still.
Why is this? Clearly, the real value of the sofa is in its resale value to the average consumer, not the retail price you paid at the sofa store. So why is there a huge disparity between retail prices and actual values? Or put another way, why are retail prices completely made-up numbers?
I think a lot of it has to do with supply and demand and also the availability of money, which in effect, is the same thing. The sofa store has a steady stream of people coming in to look at furniture. They have loud ads on television and the radio and big flashy multicolored ads in the newspaper. This drives up demand and drives up foot traffic. They offer E-Z financing, so more people who do come in, can buy. So they have a supply of customers which generates demand.
In reality the term "supply and demand" is redundant. It really is "supply and supply" - supply of customers, supply of money, supply of product. Demand is simply the supply of customers with money ready and able to spend. It is not a different thing than supply, just as different aspect of it.
By the way, this is why college tuition skyrocketed once both government-backed and private student loans proliferated. When you increase the supply of available money to spend, you increase the supply of customers (demand) and thus prices can go higher - and they do.
When you try to sell your used sofa, you don't have the flashy showroom, loud ads, and E-Z financing. All you have is a poorly worded Craigslist ad with a badly shot photo you took with your cell phone. Few people are looking at it, and fewer still are willing to take time out of their day to drive out to your house and look at your sofa, fully expecting it to be full of cigarette burns and food stains.
Availability of money is the other half of the equation which also drives demand. A person going into the sofa store can finance entire living room set with easy low monthly payments provided by the consumer financing company that the sofa store contracts with. All you need to do is give them your social security number and maybe a pay stub and they can pre-approve you for a loan.
Or, the sofa store accepts credit cards, which you can't do as an individual seller - or at least you're not inclined to do. As a result, it's a lot easier to sell sofas at higher prices at the retail store. People look at the sofa in terms of monthly payment, not overall cost. And not as many people have the full amount of cash to pay for the sofa.
Again, the supply of money determines the demand for the product or more precisely the supply of people willing and able to buy. I noticed this before with regard to older cars. Back in the day, banks were reluctant to loan money on used cars that were over five years old. And a funny thing happened. When you saw a car for sale that was four and a half years old, the price was rather high. The once the car was five and a half or six years old, the price dropped precipitously, even if the condition was better and the mileage was lower the corresponding four year old car.
And the reason was pretty simple. People could afford to buy a four or five year old car through a car dealer or by getting financing from their credit union. So the supply of money and the supply of buyers is higher for such vehicles. However, for the car over five years old, the pool of buyers was only those who can afford to pay cash for such a purchase - and that's an awfully damn small pool. The supply of cars exceeds the demand or more precisely the supply of vehicles exceeds the supply of buyers (the supply of available money), and prices drop accordingly.
When the price goes down, this means more people with cash can afford to buy, so the supply of buyers increases until there is market equilibrium.
Of course, that was more than a decade ago. Today, banks and finance agencies will loan money on all sorts of jalopies up to a decade older - maybe even older. Back in the day, in order to avoid being stuck with a bad loan, they usually required a large down payment and limited how old the vehicle could be before they loaned money on it. The idea being there should be some sort of collateral there they can collect on if the loan went bad. And after a car is over five years old, most of its useful life is behind it. So you're not going to write a five year loan on a five-year-old car because by the end of the loan, the car is worth nothing - and during the term of the loan, its value is less than the loan balance.
Well, that was then, this is now. Today, people will write 7-year loans on 10-year-old cars and wonder why it all goes horribly wrong when the buyer defaults. The buyer is under water for the most of the life of the loan and thus have little or no incentive to pay off the loan over time, but rather just hand the keys to the bank and turn in the car. And so the lenders go to the government for a bailout based on their poor choices and poor financial lending standards. But I digress.
The interesting thing about this phenomenon, is that it points out how you can save an awful lot of money in life by looking for bargains that exist, rather than looking for outright steals or looking for special schemes to get ahead. If you can find that really well maintained sofa that's only three or four years old, you can buy it for half the cost of the brand new one and get similar life span expectancy out of it.
Now, obviously there are laws of diminishing returns at work here. Yes you could buy a twenty-year-old sofa, but it's likely full of cigarette burns and food stains and perhaps smells bad. The upholstery is ripped and it's really just junk. Things do wear out over time, which is something you realize once you've been on this planet a few decades. Nothing stays in pristine shape, even if it's never used. Those so-called "barn find" cars that you read about in the paper are usually completely clapped-out because they haven't been used for so long. It takes a lot of time, effort, and money to put them back into working order. And even then, antique cars like that are usually more a talisman of cars than actual vehicles, as their parts are so delicate that they can't be driven very far before they break down again and again. The Weibull curve cannot be denied.
I'm not sure where I'm going with this, only that that the "it's worth something" mentality drives me nuts. Mark's family was into this and my family was as well. They would say that such-and-such object was precious and collectible, but it was really not worth anything to anyone. As I noted in a very early posting, I inherited ugly old shoe from my mother which was supposedly made in the 1700's. Yes it is an antique, but it's not something you want to look at or even play with or touch or show off to others. It was just an ugly little shoe, and it was very, very old. I sold on eBay for a few hundred dollars, which was a lot better than having an old shoe.
Would someone have paid thousands of dollars for the shoe at auction? I doubt it. Shows like Antiques Roadshow and things of that nature tend to drive this idea that people will pay astounding amounts of money for old things, simply because they're old. Also, the idea that people will pay a lot of money for things that are ugly because of their rarity, which I think is also flawed.
This idea that things you paid a lot of money for in the past are still "worth something" can be crippling. I know a lot of people who hang onto possessions out of pride, because they won't sell them for their real market value - which is often less than half, or even one tenth of what they paid for them. Worse yet, they rent one, two, three or even as many as six (!!!) storage lockers, paying hundreds of dollars a month to store things that, in reality, are barely worth thousands. Worse yet, people will spend thousands of dollars to move possessions worth hundreds - possessions that could be sold and converted to cash and moved in your pocket.
Possessions are a trap and can be crippling.
