# Huge Tax-Free Investment Returns

By Philip Brewer on 28 September 2007 (Updated 19 November 2012) 24 comments
Photo: Philip Brewer

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%.

## The math

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

### Tax-free

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.

### Secure

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.

### Inflation-protected

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.

There are also disadvantages. They don't invalidate the strategy, but you need to be aware of them. Some key ones are:

### Illiquid

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.

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### Bulky

There's no way I could fit 30 cases of wine in my apartment. (I could probably fit one case, though.)

### Changed tastes

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.

### Increased consumption

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.

### Research costs

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.)

### Deflation

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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Very nice writeup. The wine really struck me, because there was a discount+rebate a while ago on one of my favorites and got a couple extra bottles. Months later I wish I'd stocked more, both because that year went out of the store, and the discount was significant!

I do tend to shop at the bulk stores for lower prices and convenience, but never considered the power of bulk-purchase returns if you get a good discount or up-front price. Food and food-related items that store well probably top the list of things to do this with, but anything technology related is probably going to net you negative returns.

PS: Looked at Fuel Bank?

FYI 33.35% is a nominal rate. (.092644*360). The effective interest rate is 1.00092644^360-1=0.39566. This is nearly 40%, and that is how a bank would advertise this investment if it could.

for quite some time. It's also less gas back and forth and much more efficient for the household, as you mentioned. Dealing with ever growing crowds at the grocery and bulk stores makes my head pound and my eyes glaze over, so I try to really load up when I do bother to go. Even when we lived closer to civilization we did this. Honestly, I don't know how people go through the aggravation every single week.

Good write up on the investment returns.

Wise Bread actually did a story on the Fuel Bank a few months ago. Well worth reading. It's a sound idea, and a good example of just what I was talking about, but I worry that it might fail just when it's most needed--going broke and shutting down just when fuel prices spiked up to unexpected peaks.

Thanks to the commenter added the effective interest rate calculation. I was afraid I already had as much math as really fit into the story; having that tidbit in a comment is perfect.

My wife and I live within walking distance of the grocery store, so we do some of our shopping European-style--going to the grocery store almost daily to get fresh ingredients for that day's menu. But that's totally compatible with stocking up when staples are cheap, giving you the best of both worlds.

Great point! I had a blast doing that in Italy when I was walking distance from the lakeside plaza. You're right, if you feel the need to splurge on some portabellas or sun dried tomatoes it doesn't feel so bad if you know you are stocked up on cheap pasta and great wine at home. And you're going green by buying locally.

It's funny you mention bulk wine because one of the best deals we ever found was in southern Arizona. There's a great little winery that will sell you a case of bottles for \$110, and you get to select any 12 bottles you want. The only ones off limits are their special reserves. Now, you can go pick out 12 bottles of 10 ten dollar wine and save 10 bucks, or you can pick from their really great collection of twenty-five to thirty-five dollar stuff. Of course you know what I chose, but hey, that's up to you. I don't know if they would go lower if you bought several cases or not. But getting a 30 dollar bottle of wine for less than 10 bucks is my kind of deal. I've had a bulk buying post in the works for a while now, but I have to say I hadn't even considered the extra bonus of what you just wrote up. Now I feel extra great about stocking up.

Generally buy only when specials available.Realised several years ago that the returns were as good if not better than investments. We had a special SSIA account last year the return was approximately 25% over five years. However if we purchased two packets of washing powder on special offer. We had an instant saving in the region of 30%. Its a great way to increase the return from your dollar or euro.

... or you can pick from their really great collection of twenty-five to thirty-five dollar stuff.

I bet they figure that letting people enjoy a full case of truly fine wine is just the way to help them develop a taste for the good stuff. Of course, that can be a true win-win.

You know, you might be right there, Philip. Although, this was one of their regular offers, not a short term thing . . . maybe because it was a lower income area they figured that fewer people would be able to take advantage of the deal? Either way, we were in love with the quality of their good stuff. We go through a fair amount of the boxed stuff too, but this stuff was really phenomenal for the price. Once the dust settles from the winterizing of the cottage, we are going to see if we can order it in bulk over the net. It was really that good, at least from our perspective.

Great advice, although I disagree with the math. If you spend \$2754 today in order to pay for \$3240 worth of wine that you would have paid in increments, your return is simply \$(3240-2754)/2754. Actually less, since assuming your would have invested the 2754 in an interest bearing account.

I think my way is a valid way to look at it--arguably the best way.

Suppose you did invest the \$2754 in an interest-bearing account and then drew out \$9 each day to pay for your wine. If the account earned 5% interest, it would run dry after 313 days. The only way it would pay out \$9 per day for 360 days would be if it paid an interest rate of 33.35%, just as I said. (As an earlier poster suggested, if a bank actually paid that nominal rate, they'd be sure to claim in their ads that the compounded rate was 40%.)

If an alternative investment would have to pay that rate to stay even, I say that my calculation of the return is not only perfectly reasonable, but actually correct.

I appreciate the humor in this article, but I think Ryan has a good point. The problem with comparing it to an interest bearing account over the course of a year is the year part. You didn't spend \$9 a day, you spent \$2754 all at once. Also, the return on your investment happens all at once, too, so there shouldn't be any compounding.

To get even more outrageous numbers, why not say this: I buy 360 bottles of wine in bulk for \$2754. I have a party with 360 guests and use all of the wine in one night. If all 360 guests brought their own wine (bought individually), it would cost \$3240. Therefore my return in ONE DAY was 17.6%. An interest bearing account, compounding daily, equivalent to that would need to advertise a 1.176^365 = 5.78% * 10^25 APR! Yes, that's almost 58 SEPTILLION PERCENT APR, woooo!

@Jon:

On the contrary, I think your calculations are exactly right.

Suppose you go to a loanshark and say, "The guy who was supposed to buy the wine for our party is stuck in traffic and won't get here until after midnight, but I need \$2754 right now!"

The loanshark (being keenly aware of the discounts available in the retail wine business) says, "Okay, I'll loan you \$2754 right now, but I'll send my boys over first thing tomorrow and you'd better have \$3240 or you'll be needing some very expensive knee replacement surgery that afternoon."

What interest rate is the loanshark charging? He's charging \$486 on an overnight loan of \$2754. That's 17.6% per day or 6441% per year simple interest. If he can compound that return daily for a full year he would be able to buy the entire known universe before it was over. He'd probably run into some practical limitations before he reached the full 159 octilion dollars he could expect from lending out the 364th day's mere \$135 octillion at 17.6% for one last day.

And, of course, those practical limitations are directly connected with the ones I referred to in my article. Stockpiling only provides these outsized returns for things you're going to buy anyway. There is no rate of return on stuff that you weren't going to use.

I love your article. I do this with everything from food to school supplies and i save an average between 60-90% each time i do..we work all the money saving angles when stocking up with sales,loss leaders,coupons and rebates! we have the conveince of having exactly what we want need and use right in our home whenever we wish. so theres no shopping when the weathers bad or we're busy or the kids get sick. Plus the money we save on gas to us is priceless, Because we stock up all at once when we go to shop for those things. And at a savings of 60-90% on food and goods, the savings equals up to what i would make at a part time job. Which is great, makes our meager income spread so much farther.
STOCK PILING ROCKS! i have been doing it for like 3 years and i am beginning to teach my kids the art of doing it. Now i no longer get bored i get a thrill each time i can save 60-90% on things we use and need everyday. It makes us feel more in control financially as a family.

These calculations are not quite right; it is a money savings, but not 33%.
First, look at the problem this way:
If interest rates were zero, you could either spend (using year = 360 days for round numbers, as Phillip did above):
\$9/day for 360 days, or \$3240.
The same number of bottles as 30 cases with a 15% discount is \$2754.

So at *most* you can save 15% with this strategy of buying the 360 days at once.
However, if you consider that money has value over time (\$5 now is more valuable than \$5 later, because you can profit off the interest in the meantime) you won't be able to hit that.

The correct way to do the present value calculation is (in Excel, assuming a 5% interest rate)
=PV(5%/360,360,9)
=\$3160.12
What this means is that the cost to you *right now* of shelling out \$9/day for the next 360 days is only \$3160.12, not \$3240, because you can earn interest off of the money you haven't spent yet in the meantime. In other words: if you put \$3160.12 in an account that earns about 5% annual interest compounded daily, you will be able to withdraw \$9 a day for 360 days before the account is empty.
So the actual savings by buying all the bottles now? (3160.12-2754)/3160.12 = 12.85%.

I'ts still not a bad savings, as long as the storage of the wine (and the effort to haul home 30 cases) is worth the hassle to you. But it's not going to save you 33%.

A second way to look at it-
As said above, I can cover \$9/day for the next 360 days by spending \$3160.12 today (with 5% interest). If it's possible to save 33%, there must be some way to buy (or arrange to buy) 360 bottles of wine today for (\$3160.12*(100%-33%)) or \$2085.68.

Now for the question: will it *earn* you 33%?
No. For this to be true, I would have to spend \$2754 at the beginning of the year, and end up with \$3662 (133% of \$2754) at the end of the year. Even if I drank no wine, and re-sold every bottle at retail, this would get me only \$3240. Once you throw in the cost of selling the wine, you'd probably have little to no profit, getting you a very small return if anything.

I hope the article made it clear that the huge tax-free returns only accrue to people who actually use whatever they've stockpiled. If they turn around and try to sell it, not only does the hugeness vanish, but the tax-freeness vanishes as well. (You don't get these outsized returns running a wine shop.)

It's true that you could invest the money in something else, if you didn't invest it in wine, but that's true of every investment. Generally, you want to calculate the interest rate that applies to each investment individually and then compare them over some time period (a month or a year), rather than net out the interest rates up front and calculate the residue. If you had a CD that paid 6%, would you say that it only returned 1% because you could get 5% on a savings account? In that case, I guess you'd have to say that the savings account paid 0%, which would just be confusing. Better to calculate each return and then compare them.

As a side note, pre-packaged foodstuffs (canned tomato paste, boxed cereal, dehydrated fruit, bottled wine, etc) have never, even once, fallen in aggregate annual retail price over the last 50 years. This investment advice has a proven track record.

A few very important other factors:

1) You save tons of money this way in gas and shipping prices, and TIME. I mail order things in bulk, often with low flat rate shipping. And I always have 50+ rolls of toilet paper in my house, so not only do I have the peace of mind that I will never run out when I need it, but I will never have to waste 30 minutes and a gallon of gas to run to the store when I need a single 50 cent roll. This can often translate into much higher savings (ie if I need a 50 cent roll of TP but I spend a dollar in gas getting it, not to mention my lost time, I've spent 300% of the original price!

2) Commodities in general, and foodstuffs as a reader mentioned, always INCREASE in value, so you are buying things at a lower price today than they would cost you 6 months or a year from now.

3) Your "negatives" are all technically valid, but in actual practice rarely come into play. Bulkiness--I buy 100 razor blades instead of the 4 pack. It takes up about 6" x 4" and costs about 1/3 the price. Your wine example is bulky but I don't think it's the best example of what to buy in large quantities (and who drinks a bottle a day anyway!)Illiquid? Technically yes, but this is money you supposedly would have been spending on this product ANYWAY throughout the year, and these are staples that you need, not luxury items like HDTVs that you choose to buy or not. Risks of spoilage well thats just common sense.. you don't buy 50 pounds of hamburger meat. Household items (non-food) are some of the best deals and the most important things to stock up on (ie I don't care too much if I'm out of rice, but if I can't shave in the morning, I'm in trouble). Deflation does not exist in America. And research costs? I actually know the prices better when I'm spending \$100 for many items versus 2 bucks for a single one.

You wrote:
It's not sexy

Actually, I'd be much more interested in the guy who carefully buys in bulk than the one who made a killing on biotech stocks :-)

To me, the #1 reason for stocking the pantry and fridge is that it is an enormous pain to drag the kids to the store for a big shopping trip, and I prefer to do it as little as possible.

Less trash. I buy mostly from bulk bins, thereby generating little waste. Since I have less packaging waste, I can use the smaller trash can for trash pickup and save a little money there as well, in addition to causing less environmental harm.

Much less driving. The store with the best (bulk) prices is a 20 min (each way) drive away. The savings on fuel from only going once a month is substantial.

Peace of mind. I don't have to worry about feeding the kids if there's a storm that closes the roads, or if I'm sick with the flu and can't go out to shop. I don't have to worry about the cat chewing my arm off in my sleep if I forget to buy her food :-)

Space! In fact, it requires proportionally LESS space to store bulk staples than heavily packaged, processed convenience foods. That 20 lbs of flour becomes a heckuva lot of bread.

I have bought in bulk a for years. My wife almost killed me when we lived in a mobile home and I bought 3 case of toilet paper. I got name brand TP for less than 75 cents per 4 pack. (I wish I could get that deal again.)

Just be carefull if you plan on using the bulk shopping clubs like Costco, Sam's Club, etc. Know your prices because sometimes they charge more per item, quanity, pound than you can find at even Walmart or the local grocer. I wrote about buying in bulk on my blog Change Jar Savings.

Nice article.

I recently joined Costco and have been trying to get into buying in bulk. As Jim said, I do try to compare costs before buying in bulk, so I make sure I'm not paying extra.

Unfortunately, I think you miss one aspect in the analysis. When you spend all the money up front, you must also take into account the opportunity cost, e.g. the risk-free rate. This is precisely why you're experiencing the "doubling" of return. You also realized that half of the money is tied up on average, yet you did not account for this.

@ Jushua:

Sure I do.  I treat it just like any other investment where you invest all the money up front and then receive a stream of payments for a period of time.  The only difference is that the payments take the form of bottles of wine or cans of tomato past or whatever.  The math is identical.

Go ahead and work out the math for a similar scenario and you'll see that it works out the same.

Granted, you could earn the risk-free rate instead--but that doesn't reduce the payout of this investment.  The right way to do the analysis is to calculate the rates of each of the alternatives you care about and then compare them.

Something else to possibly do to increase your returns and realize how much you're saving would be to open a savings account or some other interest bearing account and put the money you save from your bulk buying into that account and see how much you have after a year. Interest rates aren't the best right now but it would give you a great illustration of how much you saved and you would also be gaining that much extra from the interest you earn.