[ARC5] Holy cow!

[David Stinson]

----- Original Message ----- 
From: "J. Forster" <jfor at quikus.com>


> This is the standard business model for some surplus dealers:
>
> They buy for next to nothing.
> Store the stuff, often for years.
> Wait for the customer who has to have the item.
> Virtually anything they get is all profit.
>
> In some ways, it's not a bad bet. At least it has kept pace with
> inflation, if you can eventually sell it.

It's a horrible bet, John, because of their Opportunity Costs.
At first glance, it can seem like a good idea.
Assume he spends "next to nothing," say $1000
to buy all that "stuff" he's hoping to sell someday.
He wants to ten-fold his money and get $10,000.
He figures he'll wait until he gets "his price."
If you've ever been around surplus, you know that
holding stock for as much as ten or 15 years and more is common.
But let's assume he's "right" and sells it in ten years for $10,000.
If he'd invested his $1000 at an historic business return
of 9%, he'd have made $1459 profit on his $1000,
so it would seem he's made a good choice.

But that's not the whole story....
If you're going to have "surplus" inventory, you've got
to have a place for it to "live."  Let's assume the best:
The dealer has a paid-off place in an area zoned for
his business.  It's a cheap town so the value of his
warehouse and business equipment is $90,000.
He has to pay property taxes on it, so that's about
$1500 a year.  Many states have a yearly tax on inventory
so that must be figured-in, but let's give him a break and
put him in a state that doesn't collect it.
Unless he wants to do business in the cold and dark and damp,
he's going to need utilities.  Let's say he's Scrooge and
will shiver in the winter and scribble under used candles.
He can get by on, say,  average $150 a month.
That's $1800 a year.
So in reality, he's dedicated $94,300 worth of his assets
in year one to establish his "business."
Each year after that, he must add the costs of property taxes,
utilities and misc. plus the investment return he could have had
from them if they had not gone into "the business."
These compounding calculations have been simplified,
because you'll get the idea.

So... Here's the *real* Opportunity Costs of the "Surplus dealer" 
model:

Inventory:  $1000 + $940 10-years forgone investment income
Property (if liquidated & invested)  $131,339 forgone inves. income.
Ten years prop taxes:  $15,000 + $14124 forgone investment income.
Ten years of utilities:  $18,000 +  16949 forgone investment income

Actual costs of holding out 10 years to sell his junk:  $164,352.
And this is assuming everything goes just as he hopes it will.

But let's say my "historical return on investment" is way out of 
whack,
and the Opportunity Costs are only, say, 1/3rd of this.
In that case, he's forgone $54,784  and waited 10 years
to make his $9,000 "profit"  (in most cases, he ends up
waiting 15-20 years, he dies and his children sell it for scrap).

This is not a smart business model.
It's akin to something the United States Government would do.
And like Uncle Sam, you can show him the facts and figures
until you're blue, and he'll just cuss and ignore you.... sigh.

73 DE Dave AB5S