Huge Tax-Free Investment Returns
What sort of investment return would it take to get you excited? You can get 5% or so on cash these days. The average return from the stock market runs in the 10%-12% range, depending on how you measure it. The fact is, though, you can pretty easily get 30% or more on investments that are not only very safe but come with built-in inflation protection.
Don't get too excited--this isn't a new idea. It's just working through the math on an idea that you already know: buying in bulk and stocking up during sales saves you money. If you calculate the money savings as an investment return, it turns out that stocking up on groceries and other things you use will yield a much better investment return than your mutual funds are likely to.
Suppose your household drinks a $9 bottle of wine almost every day. Now suppose that you negotiate a 15% discount for buying 30 cases--a year's supply--all at once. Saving 15% is well and good, but it's not an investment return to get all excited about. But if you do the math, your annual return is quite a bit better than that. In fact, it comes to over 33%.
If you have a financial calculator, here's how to do the calculation. (If you don't, there are plenty of financial calculators on the web.)
Your investment is $2754 ($9 times 12 bottles-in-a-case times 30 cases = $3240 minus your 15% discount), so plug that in as the Present Value. Your Future Value will be zero (once you've drunk the wine, it's gone). Your Payment is $9 (the value of the bottle of wine that you take out of your wine cellar each day). The Number of Payments is 360 (the number of days your investment pays off). Hit the Interest Rate button to find that your return per period is 0.092644%. Multiply that by 360 to get an annual rate and you get 33.35%.
It's not just a fluke, by the way, that the investment return is about double the discount: your return is steady day after day, but on average over the course of the year you've only tied up half your investment. (That is, on day one you've tied up $2754, but a day later you'd have bought a bottle of wine, so that's $9 less that's tied up. After six months you'd have bought 180 bottles of wine so that's $1620 less that's tied up in your wine cellar.)
You don't have to buy a full year's worth of something in advance for this to work. In fact, if you can get the discount on one case at a time, the investment returns are much larger on an annualized percentage basis, because you have so much less "invested" at any one time. If you can get 10% off by buying one case of wine, and then repeat the transaction every two weeks, you're getting an annualized return of 260%. (It's basically pay-day loan math, but in your favor.)
It works for small transactions as well. If tomato paste usually costs 45¢ a can and you find it on sale for 33¢ a can and buy a year's worth, your "return on investment" (treating each can taken from the stockpile as being worth 45¢ until, a year later, they're all gone) comes to better than 65%.
Advantages beyond the outsized return
The "investment return" isn't the only advantage to buying cheap and stockpiling. Your investment is also:
Suppose a bank would take your $2754 investment and give you a CD that paid $9 a day for 360 days. No bank would offer you a deal like that, but if you found one that did, it would report the $486 in interest you got as taxable income. Taking a bottle of wine out of your cellar, though, incurs no tax liability.
Your wine cellar is not going to abscond to Rio nor declare chapter 11. It's not going to take a beating if the Fed raises interest rates or oil prices go though the roof. It's just going to sit there letting you take $9 bottles of wine out all year. It's vulnerable to ordinary hazards like theft and fire, but you are protected by your homeowners insurance.
Even if you could get that imaginary CD that paid $9 a day, if prices go up to where wine costs $10 a bottle, you're still out of pocket an extra dollar every day. Your wine cellar, though, will keep giving you bottles of wine. If you care to, you can whip out your financial calculator and calculate that your average return just got even better.
There are also some non-financial advantages. Your whole household runs more smoothy when you don't have to rush to the store to pick up something you've run out of. And, with staples on hand, you're a lot less vulnerable when a blizzard or a flood prevents suppliers from restocking the grocery store.
Disadvantages (obvious and not-so-obvious)
There are also disadvantages. They don't invalidate the strategy, but you need to be aware of them. Some key ones are:
If you need the money for medical bills or a car repair, you're not likely to be able to sell the wine or tomato paste to raise cash.
There's no way I could fit 30 cases of wine in my apartment. (I could probably fit one case, though.)
Suppose a month after you lay in 30 cases of wine you convert to a religion that prohibits drinking alcohol? Or you quit eating beef and what had been enough red wine to last a year is now a lifetime supply? Or you simply decide that the robust shiraz that you liked so well lacks subtlety--leaving you with 24 bottles that you're never going to want to drink.
Suppose you drink a bottle of wine once a week or so, and decide to buy four cases, thinking it will last you almost a year. It could very easily turn out that, having just the right wine already on-hand each day at mealtime, you find yourself opening a bottle way more often than when you had to make a special trip to the store to pick up a bottle. The investment return is still there, but it (and more) will end up being eaten up by your increased standard of living.
Risk of spoilage
Wine keeps pretty well. So do cans of tomato paste. But other things don't, and if you try to stockpile something that goes bad, you can lose much or all of your investment.
Success depends on buying things at a good price, so you need to know what a good price is. (There' s no point in stocking up on 69¢ cans of tomato paste from the convenience store.) You could spend quite a bit of time and effort tracking prices and still occasionally make a mistake and buy a bunch of something that you could have bought a lot cheaper later. (Of course, that's true of Wall Street investments as well.)
Just as the system shines during a period of inflation, it does poorly if prices are falling. If something is going to be cheaper in a few months anyway, why not just wait until then to buy it?
It's not sexy
When a guy at a party mentions that he's got a 50% gain in some biotech stock people will be a lot more impressed than when you claim that you've made 65% in tomato paste. Bring out a financial calculator to do the math for them and their eyes will glaze over. Short of claiming that you've made 65% in tomato paste futures, I'm afraid you're stuck.
Not a solution to all your investment needs
The investment return on stockpiling your ordinary goods when you can get them at a good price is a lot better than most people will get on most of their investment portfolio. And yet, people still invest in stocks and bonds. There are two big reasons for this.
First, a stockpiling strategy is inherently limited. It's limited by storage space, shelf life, and the fact that tastes do change, making it unwise to buy a multi-year supply of almost anything. It's also limited by the size of your budget: these outsized returns only apply to the things you actually use--there's no advantage in stockpiling stuff you're not going to use, no matter how good the discount is.
Second, stockpiling won't make you rich. When people invest in the stock market, it's with the dream that they'll eventually be millionaires who can quit worrying about whether 38¢ is a good price for tomato paste.
What stockpiling can do is free up a lot of money without reducing your standard of living at all. Look at that money as an investment return, and maybe it will motivate you to grab some of it--which you can then invest in something that does have a chance to make you rich.
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