Mistakes & Opportunity Cost
When I was twenty-four years old I was finishing my MBA, well on my way to a life of riches—or so I thought. I was invincible. It was only a matter of time before I was on the Forbes 400 wealthiest people list. The only thing rivaling my future estimated wealth was my oversized ego.
While still in graduate school I inherited about $7,000. My parents encouraged me to sock it away and invest it. My arrogance and immaturity overrode their sensible advice. There was no need to save for a rainy day since I was going to make more money than I’d ever need. Wow, how wrong I was!
Instead, with my delusional guarantee of future riches, I took my windfall and bought a loosely disguised race car. It was loud, fast and obnoxious.
In no time I managed to blow the engine up. While having it rebuilt, I decided to do a frame off restoration of my car by myself.
Now I had to rent a garage and buy tons of tools for my restoration project. Never mind the fact that I had no time or skills necessary for such a project. Soon, I was broke and ended up selling off what I had at a significant loss.
This was certainly a painful lesson that reinforced the fact that racing and race cars, are a wealthy man’s game. It also helped me recall a basic lesson I learned in college.
During my sophomore year at Texas Lutheran University I took economics. Eco was one of the hardest, but best classes I have ever taken. Here, I was introduced to the concept of “opportunity cost”. Simply put, opportunity cost states that if you spend money on something, no matter what, you are effectively arguing that this is the best way to allocate or invest those funds.
I should have considered this before my ill-fated foray into the world of high-octane speed machines.
At the same time I bought the beast, I had the opportunity to put a similar amount of money into Warren Buffett’s company, Berkshire Hathaway. Unfortunately, I failed to assess the opportunity cost of my decision.
Ultimately, I sunk seven grand into a car I never got back. If only I had been more mature, disciplined and logical.
Ten years later, the value of my missed opportunity in Berkshire had grown to a whopping $60,000. At this point, I felt the sting of my decision. After twenty years, the opportunity cost of my decision to pass on Berkshire had risen to $120,000. Ouch!
Today, the missed potential investment in Buffett’s company has now cost me more than $335,000. For more than thirty years, Berkshire Hathaway’s stock has grown more than 15% per year. As such, that race car I purchased has really cost me an amazing $335,000 when one factors in the opportunity cost. This has been a very expensive lesson.
Worse yet, as Berkshire becomes more valuable, the opportunity cost associated with my decision only becomes worse.
The lessons to be learned from my poor decision making are simple.
Separate needs versus wants. The race car was obviously nothing but a selfish want. Furthermore, it unnecessarily put financial pressure on a young marriage. Secondly, don’t count your chickens before they hatch. Money is hard to make and even harder to keep. Whether hard earned money from a paycheck or a windfall, be smart with your pennies and dollars. And finally, when you allocate money truly evaluate the absolute best place for those funds to be spent or invested. This is true whether you are looking at buying a new house, paying down debt on a credit card, investing in your 401(k) plan or stupidly wanting to blow it on a toy.
To make sure I don’t lose sight of these lessons, I force myself to update the math on this decision at least once a year. It helps to look in the mirror and revisit and learn from your mistakes. Hopefully, I won’t commit the same unforced errors in the future.