When I was 24 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 that rivaled 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. It would make for a great down payment on a house they told me. 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 could ever need.
Instead, with my delusional guarantee of future riches, I took my cash and bought a 1970 Pontiac GTO. It had a 455 engine with a four-speed and it cranked out 500 horsepower. It was a loud, fast and obnoxious beast.
Although I am not sure this was my biggest mistake, it was certainly a huge one. In no time, I managed to blow the engine in my GTO. While having it rebuilt, I decided this would be the time 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 the 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 old cars, and auto restoration, are usually a wealthy man’s game. It also helped me to recall a basic lesson I learned while in college.
During my sophomore year at Texas Lutheran University, I took economics from Dr. Annette Citzler. Eco with Citzler was one of the hardest, but best classes I could 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 muscle cars.
At the same time, I bought the GTO, Warren Buffett’s company, Berkshire Hathaway, was trading for about $7,000 per share. If I had logically assessed what to do with my inheritance, I would have invested in Buffett’s company. Unfortunately, I failed to assess the opportunity cost of my GTO decision.
In the end, I sunk seven grand into a car that I never got back. If I had listened to Dr. Citzler, or my parents, I would have invested in Berkshire Hathaway. Today, that one share of Buffett’s company now trades for more than $127,000 per share.
For the past 20 years, Berkshire Hathaway’s stock has grown more than 15 percent per year. As such, that GTO I purchased has really cost me $127,000 when one factors in the opportunity cost. That has become a very expensive lesson.
Worse yet, as Berkshire becomes ever more valuable year in and year out, the opportunity cost associated with my decision only becomes worse.
The moral of this story is simple. Separate needs versus wants. The GTO was obviously nothing but a selfish want.
Secondly, don’t count your chickens before they are hatched.
And finally, when you allocate money, truly evaluate the absolute best place for those funds to be 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.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.
Author: Dave Sather
Originally published Wednesday February 23, 2011
Victoria Advocate