Posts Tagged ‘Buy’

Then I was not a fool …

Thursday, September 11th, 2008

In my last few posts I had it about being a fool and paying too much for anything.  I want to share with you this true story from my own life.

 

A couple of years ago I was looking at buying a filling station.  I saw an advertisement and phoned the agent.  We went to the site.  The station use to sell about 350 000 liters per month, but “because the last owner was no-good”, it was now only doing 90 000 liters.  There was no shop, no extras.  Just a couple of old pumps tended by almost dead attendants.  I said the price is too high and the agent referred me to the contact person at the oil company.

 

Now let me give you some background on the station.  Although the site is on a very busy road and very close to many industries, it is not a nice area – I would not allow my daughter or wife to work there, it feels unsafe.  For a long time it was the only station in the area, but I knew that another oil company opened a site a couple of kilometers away.  Theoretically the new site should not influence this one, but theory and reality is not always the same.

 

So I phone the contact person and asked him about the site.  His opening words were historical – the site did do 350 000 liters before and it could do the same again.  I reminded him that the site was doing much less and without an operator would do even worse.  He agreed with me.

 

Then we got to the price and I said I think they are selling the site as if it were doing about 180 000 liters, double what it is doing.  “Yes, you are right.”  “But why are you doing it?”  Says Mr Oil Company:  “But surely you realize the site has potential?”  “Of course I realize it, that is why I am interested.  But what you are asking me to do is to buy the potential, work very hard for long hours without any pay to realize the potential.  And only then will it be worth what you are asking for it.  In other words, you want ME to pay in advance for MY efforts?  I am not going to that!  In fact, you should pay me while I build up the site!” 

 

At this he laughed and said:  “You are absolutely right, I have never thought of it that way.  But it does not matter if you don’t buy, we will get somebody else who will pay our price.”

 

From time to time I drive past this site (even fill up sometimes) and it is definitely not doing close to 350 000 liters.  In fact, I would be surprised if it did more than 200 000.  If I did buy it (the first fool), then today I would only be able to sell it at 200 000 liters – I would never be paid for my own efforts!  I might even have lost everything I own, like the previous owner.  And I can testify to this:  I have never been able to find a second fool.

 

But always remember what Mr Oil Company said:  “We will find somebody who will pay our price.”  Just be sure that YOU are NOT that person. 

 

Be Wise, Buy Wisely.

Finding the Second Fool

Monday, September 8th, 2008

When do you make money on anything that you buy with the idea of ever selling again?  Most people automatically say:  when you sell.  But it is not true!

 

I was one day sitting in a coffee shop explaining to a prospective business plan client that I think he will overpay for a business.  I said:  “if you overpay for the business, you start behind and you will battle and never make your money back.”  The owner of the coffee shop overheard me and replied:  “It is so true.  I overpaid here and I suffer every day because of it.  I wish somebody gave me that advise.”

 

Roman law had a principle:  caveat emptor (let the BUYER beware).  The reason is simple:  the buyer has some options that the seller does not have (and therefore sellers sometimes take shortcuts!).  Let’s examine.

 

  1. The buyer has the option to buy or not to buy.  The seller does not have such an option.  If the prospective buyer does not buy, the seller still has his for sale item.  The buyer can walk away, the seller can’t.
  2. The buyer mostly has a number of options to choose from.  Very seldom does the seller have so many buyers that he can pick and choose.
  3. The buyer can mostly decide what price he is prepared to pay for an item.  In most cases the buyer has to accept the best offer.

 

You buy a share, or property, or a car or a business, whatever, and you don’t do proper homework and you pay too much.  In other words, you buy something that is really worth R200 for R300.  If you want to sell it immediately, even without a profit, you need to find somebody else who is prepared to pay R300 for something that is worth only R200.  You have overpaid and need to find somebody else willing to overpay!  I have done it (overpaid) many times, that is why I always say: “I always find it easy to find the first fool.  The problem is finding the second fool.”

 

But even if you don’t want or have to sell immediately, what happens when you sell in future?  Let’s assume it is a business and you have really built it up.  After all your hard work, it might now be only R300 (based on a net profit factor).  And you will battle to do better. 

 

I know a lady (in her 70’s) who is one of the best business people I know.  She has an antique shop and since I am interested in wooden furniture, she once took me on a tour of her warehouse.  While walking through the warehouse she told me the history of various pieces and where she bought it and what she paid, with the selling prices already marked on the items.  Then she smiled and said:  “As you can see, I buy at a low price, but I sell at a very high price.”  When do you make your money?  When you buy!

 

Consider this lady’s remark.  Because she bought at a low price, a potential buyer can negotiate down to a “low price”, where he believes he is buying a bargain, and she would still make money!  If her cash flow is under pressure, she can have a “fire sale” and still make a profit.  She can offer free delivery to get a deal, and still make a lot of money!

 

For the moment that is enough.  I will touch on this topic again.  Just remember:  you make your money when you buy.  And the challenge is finding the second fool …