Comments on: Investing In Bulk Goods Can Earn Incredible Returns

By: conny

conny — Thu, 12 Jul 2007 19:39:32 +0000

the principle is sound another way of look at this is the way financial economists look at it. what intrest has the bottle earned when it is consumed. The intrest on the 9 $ has to be to meet the expense of 10 $ at some future time. And that gives real high rates for bulk buying. And it is going down for the next bottle because it has longer time to earn the intrest.

By: Citoahc

Citoahc — Wed, 14 Mar 2007 13:22:17 +0000

It is an 11.1% return at the moment of sale (Value-Cost)/Cost. After that point the value of your investment isn’t changing. You can’t anuitize it in they way you are because your returns aren’t based on time. The date you drink it doesn’t effect the value of a $10 bottle of wine and you can’t reinvest the returns.

By: Trent

Trent — Tue, 13 Mar 2007 22:45:32 +0000

samerwriter: obviously, cutting spending is even better. The purpose of the exercise is to show that buying in bulk is a really good deal, though, no matter whether you’re buying wine or canned goods or anything else.

By: samerwriter

samerwriter — Tue, 13 Mar 2007 22:24:17 +0000

You can get a much much better rate of return by dropping the wine habit, and enjoying a nice glass of water instead.

By: James

James — Tue, 13 Mar 2007 21:39:50 +0000

I think your logic is still flawed.
The savings account example works. But, it works because the remaining money in the account is earning constantly. Material goods, unless they are appreciating in value (your wine isn’t) are not earning constantly…they have a set value that you paid a set (lower) value for.

You equate drinking a bottle of wine to withdrawing $10 from the savings account. There is a fundamental difference, however, between the two. When you withdraw $10 from a savings account you decrease the earning power of the rest of the money in that account. THAT is precisely why the interest rates would be different between having $0 at the end of the year and your example of withdrawing %520 all at once at the end.

Now consider what happens when you drink the bottle of wine…absolutely nothing happens to the earning power of the rest of the wine because it was never earning anything on a percentage basis, but rather a fixed-dollar basis.

Regardless of how fast you consume the wine, or if you do it gradually or all at once, your return is based on a fixed dollar amount per bottle…NOT a percentage. It’s actually very similar to options (puts mostly) if you are familiar with them at all. Assuming things work out, you collect a set dollar amount per share. Whether you do this 3 days or 3 months after buying the option, it does not affect your rate of return because the return you actually get is not based on percentages.

By: Trent

Trent — Tue, 13 Mar 2007 21:20:53 +0000

James: not really, because then you’re adding something to your budget that wasn’t there before. The entire example hinges on the fact that you drink a bottle of wine each week as part of a routine.

I love these threads – everyone learns something and takes ideas in different directions.

By: James

James — Tue, 13 Mar 2007 21:16:33 +0000

Trent,

By your logic the faster you drink the wine the better rate of return you are getting. If I can get .925%/week (which you calculate to be 61+% return…more on that later), then sheesh, if I drink a bottle a day I’m gonna do fantastic on a yearly basis!!

1. You compounded the interest weekly for your examples. This assumes that after you extract the value, by drinking $10 worth of wine for $9, that your $1 saved continues to gain .925%/week till the end of the year. It can’t possibly do that. If you wanted to annualize it, a more correct way would be simply .925%*52=48.1%

2. You aren’t really doing anything with the money saved, so even if your calculated annual rate of return is some absurdly high number, the realized annual rate of return is just the amount saved buying in bulk divided by the amount you spent…plus some change if you invest the amount you saved.

Week 1, you pull out $10 of value AT A COST OF $9, giving you a 11.1% return. Week 2, you again pull $10 at a cost of $9, another 11.1%. At the end of the time, you got $10*n value for $9*n cost…still a return of 11.1%.

By: Trent

Trent — Tue, 13 Mar 2007 20:55:58 +0000

The value comes because you’re using it gradually. Think of it this way: you open an account with $468. Each week, you pull $10 out of it. What would the interest rate have to be on that account for you to be able to pull out $10 and close the account on the final week of the year? That’s a lot different than putting in $468 and pulling out $520 at the end of the year – it’s a distinction that really adds up.

By: Trent

Trent — Tue, 13 Mar 2007 20:30:41 +0000

Seth: your financial advisor is forgetting one key part of this: every time you pull a wine out of the case, it has a $10 value, because you would have bought that bottle of wine for $10. You’re essentially not pulling cash out of the investment, but a product that you would have paid for with cash.

By: Seth

Seth — Tue, 13 Mar 2007 20:00:31 +0000

I shared this article with my financial advisor, and he responded:

—

That’s a ridiculous post!

Unless you can turn around and sell the wine back to the store (or someone else) for $10, you aren’t “produce(ing) something with a $10 value”.

If you assume you can earn 5% in your money market, you’d earn only about 69 cents in interest by not spending the $108 up front instead of paying $10 over 12 weeks.

So you really do save 9+% by buying in bulk, but that isn’t annualized, since in this case it’s only over 12 weeks. This article is trying to annualize something that shouldn’t be. If you drink a bottle every week, then you are going to have to buy another case every 12 weeks and then save another 10% each time. You’ll do this 4 or 5 times in a year, not once.

Nobody is saying you can earn 10% by investing the $120 instead OVER 12 weeks! They are claiming you can earn 10% per year annualized.

This argument only would work if you were arbitraging it by buying in bulk and then turning around and selling to someone else at a higher price, it might make more sense to do an annualized calculation then.

—-

Any “official” response? The post did seem too good to be true.

By: James

James — Tue, 13 Mar 2007 19:19:55 +0000

Um…maybe I missed something, but why are you compounding the interest weekly??

By: Tim

Tim — Tue, 13 Mar 2007 18:38:43 +0000

another thing that buying in bulk saves are multiple trips to the store. that’s time, gas, wear and tear no the car, etc.

By: Tcom

Tcom — Tue, 13 Mar 2007 18:32:12 +0000

If you bought the entire batch of wine at the beginning of the year for $9 a piece you’d pay $468. At the end of the year you’d have consumed, or in this case had access to $520 worth of goods. Investing $468 and having $520 at the end of the year is certainly nowhere near 26% returns.

By: BillB

BillB — Tue, 13 Mar 2007 18:22:01 +0000

I don’t really understand how these are meaningful calculations. At the end of the year you’re sepending $468 ($9 a bottle) instead of $520 ($10 a bottle). Even if you want to say your initial investment of $468 is up to $520 in worth, you aren’t gaining 26% annual returns.

By: Lindsay

Lindsay — Tue, 13 Mar 2007 17:57:16 +0000

I do this with Amazon.com groceries. Through the Bargainist or Deal Hack you can find $10 coupons for groceries. I eat Luna bars every day, which are healthier than your regular candy bar. Rather then buy them at my local health food store, I get them by the case from Amazon, for $10 off, usually resulting in them cosing me $0.83 a bar, rather than $0.99 a bar. It’s only $0.16 a bar, but total that saves me $2.40 a case, and if I order over $25 worth, they’re shipped right to me.

By: Tkriger

Tkriger — Tue, 13 Mar 2007 17:43:43 +0000

The only real catch is the space buying in bulk takes up.

I live in a tiny apartment, but my mother worked at Sam’s club ever since the chain started, so when I moved out I promptly joined BJs…their prices on stuff like toilet paper and paper towels are great (usually a whole case for the cost of 2-3 single packs in a supermarket), but it can be tough to find places to keep it all.

The on ething to avoid when buying in bulk is anything that is remotley perishable, especially if you don’t have room to freeze it like me, having to throw away a pound of the 6 pounds of boneless chicken breast you got for 99 cents a pound kind of kills your profits.

By: plonkee

plonkee — Tue, 13 Mar 2007 17:07:55 +0000

I feel like there must be a catch.

I guess its that you get this incredible rate of return in wine. I’m not sure how much of a catch that is.