[ARC5] Holy cow!

[J. Forster]

Horrible or not, some do it that way.

And, you neglect a coule of things:

The markup can be a lot higher than 10x.

The hold time can be a lot longer than 10 years.

The cost of storing it can be next to nothing, if you bought land for your
business just outside an area that has grown a lot. In fact, the surplus
can be just a placeholder for a land deal.

I'll give you a concrete example: I know someone who bought a RADAR
trailer about 1975 for about $225, and still has it stored, for free, on
isolated land. It has over 25,000 pounds of aluminum in it. Good
investment or bad?

Unrealistic? There are a lot of old planes stored in the AZ desert for
next to nothing. No heat, no lights, no phone...  no expenses.

Most of the surplus dealers I know, are pretty well off, although they
don't flaunt it.

Best,

-John

================


> ----- 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
>
>
>