Its amazing how investing in the stock market is similar to investing in used cars. I am fascinated with Warren Buffett. I read everything I can get my hands on about him. He is the master stock market investor.
Warren’s wisdom about stock investing can be directly related to trading cars for a living. Lets explore four beliefs he has about investing and how they apply to the car business.
1. Circle of Competence
Its important to know what you know and more importantly what you don’t know. Invest in the things you know and ignore the rest.
I get asked, quite often, “George, what kind of cars should I buy?”. My basic response for beginners is to buy what you know. If you have driven honda’s your whole life, thats probably a good place to start. You know how they ride, what noises to listen for, what the common problems are, …. MUCH better than a guy who has only driven Subarus. Right?
My second suggestion is to always try to expand your circle of competence.
2. Margin of Safety
Always buy with a margin of safety. Never pay too much. Your rate of return on your investment will be determined by the price you pay. Never pay too much because there are always things you don’t know about the car. SO use that margin of safety to work in your favor.
If the car is worth $5,000, don’t pay $5500 just to own it. You see it is totally possible you don’t know everything about the car. In fact, I bet you don’t know everything about the car. There is an associated risk with buying any car or truck. There might be unknown repairs that need to be made once you get it to your mechanic. If you bought the car with a margin of safety, say $4500, you have $500 you can use for the unexpected repairs. OR, maybe, it will take longer to sell the car than you imagined and you will need that margin of safety for more advertising.
Remember: Buy with a margin of safety.
3. Mr Market
Mr Market is your paranoid schizophrenic partner in the car business (or more directly he might be your wholesaler, your local auction, or just the marketplace in general – in Warren’s case, its the stock market).
Everyday Mr Market, with no thought or reason, makes available cars that can be bought at various prices. You can either take Mr Market up on his offering price for the car or you can say no & wait for a better deal.
Be mindful that you can always ignore Mr Market and wait for the next car for a better deal!
Your ultimate power and most critical decision is where to allocate your resources. Your main resource is your time and money. If you buy a car for too much money or one that requires too much work – it drains your resources. Be wise where you allocate your resources.
You are using some resources to buy my study course. Mainly money but also time to learn a new skill – how to buy cars for profit. Its an investment into your knowledge. Its an investment that should yield a fair return. As a side note, if you are trainable, you can learn this business!