Go Beyond

Written by Teran McKinney.
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Equity

T've been thinking about net-worth, equity, depreciation, and the general quality and nature of goods quite a bit lately.

In general, it seems net-worth is on the downturn compared to where it once was. I'll give some examples.

  • Music. Once a physical item. Now an iTunes purchase. The physical copies worked without internet connectivity. They also could be sold. Your $12 brand new CD could probably go for $1 at a yard sale. Or if you bought used, you might only drop four dollars in the long run. The switch to music subscriptions and paying for downloads doesn't give you any actual asset to sell off. While it was a depreciating asset in the past, now it effectively depreciates to zero as soon as you buy it.

  • Books. Same story as the music. The paperbacks and hardcovers worked anywhere there was light. And they could be sold. Now, eBooks often takes their place. Very convenient, but no longer an asset at all.

  • Servers. It was once common place to buy and host your own gear. You had some physical item to sell at the end, instead of renting something you'll never see. Granted, I am in the hosting business and in a sense I am talking badly about it. Though unlike physical books and music, there's a lot you actually have to manage. It's not just the phyical item, it's reliable power, UPSs, decent connectivity, cooling, etc. I think there's a better case for renting hosting than renting music, but of course it's in my financial interest to say that.

  • Housing. Owning your own home might have been the norm at one point. Now, renting is extremely common. Putting money every month into a simpler housing solution. No grass to cut, no fences to repair. Apartments are like Netflix. Left with nothing once your subscription runs out.

There's many tangents from here. There's the aspect of purchases depreciating less and thus helping maintain your net-worth. Say you buy a 1980s circular saw for $10 at a yard sale. It may never depreciate past $10. Now possibly, you buy The Kills on CD. Immediately, your net-worth may drop the realistic resale value, so perhaps $8. But, it's better than the full $10.

Let's fixate on that a bit. Why do assets depreciate? In the case of iTunes, it's the zero liquidity, the complete inability to sell. The CDs, partly supply, the market moving on from the format, no practical applications, and a selective audience who just expects to pay little for second hand CDs. If you look at that circular saw, there still is supply being added to the market. But generally speaking, the price point is never going to go less than what you paid for it. Especially if you have what was a $60 Craftsman, made in US circular saw back in the day, and the closest price point to your $10 saw is a $30 Chinese circular saw. The fact that your asset isn't depreciating is the market saying it intrinsically has value. You can think on this further, to asking about what value is. In some cases, value is transferred over and over. In others, it's actually made.

Let's say I make plates that never break. In theory, eventually it would break (no pun intended) the factory/consumer loop. Everyone would buy my plates and then there would be enough. I'd close up shop. It wouldn't be an endless cycle of use, break, buy, repeat. In the use, break, buy, repeat model, the factory exists because of the consumers and the money moves in a circle. Now with these unbreakable plates, the plates are their own value. Minus a small cost of natural resources, something of value has been added without hardly a thing taken away. That, I believe is actual economic progress. Not the rat race pursuit of consumables, but the creation of everlasting wealth. Through plates, of course...

The market price of an item is a very interesting thing. Sometimes the price is too low, sometimes it is too high. But there's a lot that goes into this price. And while a lot of prices are because of vanity, a great deal of them comes from practicality. The Toyota trucks that never seem to lose value past a certain point. Is it vanity? Or practically, are they worth that? Why do they often go for double the cost of a truck with equivalent "features"?

Or the BMW Airheads. They do sell for a premium even still. And while they are technically inferior in just about every way, they are very simple, repairable, and the parts availability is excellent. I'm actually rather shocked that it's easier to find parts for '70s BMWs than a lot of 80's and 90's Japanese bikes. Honda seemed to stop producing certain parts rather early on. BMW kept supplying just about every part. This helps keep parts costs more reasonable, giving used parts something to compete with. And what you can't find, odds are you can make or jerry rig for without a lot of work.

Will these new cars with numerous electronics and very intricate parts still be on the road in thirty years? What I'm seeing is that the parts will stop being made and then the DIY replacements will just be too difficult much of the time.

Assuming I were to live that long, I think it'd be likely that I could ride and keep a 1970s BMW motorcycle maintained a hundred years from now. My Honda Hawk GT... maybe. Much trickier. A brand new car? Keep in mind both parts availability and simplicity of fabrication. Both are nice. But if you have ample parts floating around, in theory something more complex can still be quite viable to keep running (a 90s Honda Civic, perhaps).

So in a certain realistic sense, buying something new and complex is just renting. At the end of your rental period, there's no way to sell the product.. as there probably isn't a product left to sell.

I think that relatively few people realize the importance of equity and building up a personal net-worth. The market has all kinds of signals. Taking the time to read them can provide an awful lot of insight. And the market can plainly show a lot of right and wrong decisions, at least in the material realm. I wouldn't rely on it entirely, but it's something to look at.

I hope you can consider equity as a factor in your upcoming purchases. Are you buying something that can be fixed? What about twenty years from now? Can it be adapted to other uses, or will its one purpose last a few years at best?

For instance, I bought a headphone amplifier recently. I purposefully picked a slightly inferior model as the schematic is open source and well understood. It was also designed to be worked on. For all intensive purposes, the performance difference is inaudible to my ears. And I know I can fix it. I also have a Playstation 1 and was able to fix a couple problems on it with some help. It's a rather straight forward system and one that can be understood by a layperson, at least to some extent. And then there's vehicles. Can I meet the performance levels I am looking for and have it last me a lifetime? Not always, but sometimes a little forethought makes for a much better decision in the long run.

Thanks for reading.




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