The Most Important Number You're Not Looking At
February 9, 2024
Over the last twelve years of operating our car brokerage, you can imagine that we’ve met the
gamut of car shoppers with their ideas and habits, some more healthy than not.
“I only buy used.” “I only buy new.” “I only lease.” “I only pay cash.” “I only finance.”
Have you heard these before?
These are what we call rules or methods. It’s not a stretch to say that humans are prone to
develop, or adopt, rules or methods without really understanding why we do what we do.
But what if I told you that there are principles behind car shopping that can inform the best car
shopping methods?
What if these principles were resistant to the market, recessions, and future global pandemics?
And what if, by learning these principles, it would unlock thousands of dollars of savings and
show you how to “hack” your way through car ownership?
It’s time we divorce ourselves from rules and marry ourselves to fundamentally sound principles.
Allow me to introduce you to Cost of Ownership (which I’ll conveniently refer to as COO going
forward).
DEFINITION OF COO
COO, in the case of cars, is defined by the money we lose for the usage we gained. In other
words, what is our “net loss” for the time and mileage we put on a car?
Let’s say your office needs a copy machine. The copy machine company says “we’ll let you buy
this machine for $20k or you can lease it and pay $0.05 per copy. Which would you like to do?”
What would you do? Count how many copies you make per month, right?
If you only make 100 copies per month ($5/mo), it would be more prudent to lease the machine.
But if you made 100,000 copies per month, it would be worth it to purchase it.
But let’s say you only make 100 copies per month and your CEO says, “no, we only buy our
equipment.” Wouldn’t that be a potentially silly mistake because of a rule? (Sure there may be
other tax write-off benefits but let’s not cross that bridge for now.)
So let’s look at a car example:
If you bought a car for $50k, drove it for 3yrs and 40k miles, and sold it for $20k, your COO is
approximately $30k over 3yrs and 40k miles.
I should also note that COO is different from what you can afford. More on that soon.
I know many people who employ these principles, buy $300-400k supercars, and have a lower
COO than the average family buying a midsize SUV.
COO is not lower because you buy a cheap car, nor is it better if you buy an expensive car. It’s
just a principle that helps guide us.
Get the picture? Let’s take this up another notch and ruffle some feathers.
COO IS NOT YOUR LOAN PAYMENT
A common phrase I hear is, “I don’t like to have a payment on the car, so I pay cash.”
But is that actually happening? Don’t cars depreciate? Don’t they require maintenance?
What this is essentially saying is, “I don’t like mentally having to send out a payment” or “I don’t
want my car to affect my monthly cash flow, so I’m going to pay cash for it instead.”
BUT, this does not mean that you no longer pay for the car. In this scenario, you paid up front
(which is also opportunity cost- that’s another topic) in exchange for monthly cash flow. But your
real cost is your net loss, which you can compute after you sell the car.
Let’s take it further.
COO IS NOT MARRIED TO BUYING USED, NEW, OR LEASING
There is WAY TOO MUCH misinformation out on the web about whether to buy used, new, or
lease. And yet, COO is the least talked about topic, which is really strange. It might just mean
that most people still don’t understand how to understand the economics behind cars. Time for
that to change.
For those who would never consider a lease, what if you were shopping for a $55k truck and the
lease payment was only $250/mo? Wouldn’t it make sense to lease it than to buy it?
For those who would never buy new, what if the used car you’re looking at was only 10% off the
price of it new? Wouldn’t it make sense to buy it new than to buy it used?
For those who would never buy used, what if the used car could save you thousands?
Get the picture? Divorce yourself from the rules. Marry the principle.
COO IS PANDEMIC PROOF
I claimed earlier that COO is resistant to global pandemics. After COVID, used car pricing went
up to an all time high. And yet, TOO MANY Americans bought (and continue to buy) used cars
during the height of used car pricing and too many people will suffer because of that.
Why?
Why would people buy a 3yr old used car for only 10% off of what the original MSRP was?
“Well, Stephen, new car inventory was low.” “New cars depreciate right when you drive the car
off the lot.” “New cars were priced above MSRP.” Not good enough excuses.
Or maybe because we don’t understand COO, we lose too much money on cars. Maybe we’re
married to rules that are seriously circumstance-based instead of committing to principles that
are circumstance-less.
If you actually work with the principle, and allow it to inform your decision making, you can
actually come out on top, no matter what the market condition is.
HOW COO WILL CHANGE THE WAY YOU CAR SHOP
There’s just way too much to talk about in a brief article. But I wanted to introduce you to the
concept first. COO changes everything.
COO looks at every side of the deal (the purchase (entry), the maintenance (middle), and the
sale (exit).
COO can be applied in every type of market condition because in every market condition, there
is opportunity.
COO factors in the opportunity cost of your hard-earned cash.
COO informs the kinds of cars we buy (make/model/spec) and it also informs us when the ideal
time to buy and sell is.
“But Stephen, I don’t know the market like you. I don’t have time or the tools to study it everyday
like you.”
You’re right. That’s why we’re here to help. Ground yourself in this principle and we’ll take you
the top.
Time to lose less on cars and allocate your hard earned money towards better things.