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9

Buy the Stock, Not the Product

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Many years ago, I tuned into a radio program that would forever change my outlook on spending and saving. "Do you buy things that disappear or reproduce?" the host asked a troubled caller. As I listened, pondering my own financial future, he then offered this advice: "The next time you want to buy something, instead consider buying stock in the company that makes it. Rather than buying a Coke, for example, buy a share of Coca-Cola stock."

I didn't think much about money back then, other than knowing that I didn't have much. (I was, after all, an elementary school teacher earning $18,000 a year.) I was pretty much clueless about stocks, IRAs, and the Fed. But the host explained how most of what we buy depreciates and eventually disappears. That also means, it then occurred to me, that the time I spent working to make the money that bought those items was essentially wasted. I worked so I could buy what amounted to nothing.

Contrast that, the radio host continued, with spending money on an asset, which increases in value and can't be consumed. (Well, sure, you could eat a share of stock, but check the carb count first.) You are spending your money on something that eventually can return the favor by paying you money. Do that enough, and you won't need to work, since your money will essentially be doing all the work for you.

The sum of thousands of decisions
The crossroads of your financial future is your spending. It determines how much you keep, and how much someone else gets. For many, the flip side of spending is saving -- but saving sounds so boring. It smacks of self-denial, which is why people have trouble doing it. But saving is simply spending money on something that appreciates, rather than depreciating -- something that reproduces, instead of disappearing. This is important before retirement ("I could buy that item, or I could buy the stock") and in retirement ("To buy that item, I'll have to sell stock").

There are many worthwhile uses for money that can't be put in a portfolio. An education, a vacation, a great bed -- they all have their "appreciating" aspects that provide lifelong value. But if you spend the next few weeks observing where you're inclined to spend money, I suspect you'll find yourself shelling out the bucks for goods or services that may not be worth the long-term price you'll pay.

Buy a piece of the company
Let's come up with some hypothetical situations based on real-life companies and their real-life returns. Over time, various consumer-oriented companies put together vastly different track records. Whole Foods and Nike, for instance, have both returned nearly 15% annually over the past 10 years. Electronic Arts, on the other hand, enjoyed big gains for much of the decade, but hasn't recovered from the 2008 bear market.

Let's see what kind of money you'd have if you avoided some of the products offered by these companies, and instead bought the stock each month or year, as indicated below:

Strategy

After 10
years

Buying $50 of Whole Foods stock each month
instead of spending so much each visit.

$9,885

Investing $100 in Nike stock each year
instead of buying a new pair of shoes.

$2,512

Investing $50 in Electronic Arts
instead of buying a new video game each month.

$3,662

Investing $30 a month in Coca-Cola
instead of drinking a soft drink every day.

$4,613

Source: Yahoo! Finance. Monthly buying assumes purchase on last day of each month from May 2000 to April 2010. Annual buying occurs on last day of May for each year from 2000 to 2009. Adjusted for dividends.

Giving up relatively small purchases (as little as $30 a month) can lead to thousands of dollars down the road. Do you still value the bottles of Coke you had last month, the game you bought a year ago, the Nike shoes you bought five years ago? Or would you rather have more money in your IRA?

So spend like mad -- on assets. Maybe you can replace the "buyer's high" you get from making a purchase with an "investor's high" that will keep your net worth growing.

Of course, basing your investment decisions on where you spend your money is not exactly the optimal strategy (though it's better than spending rather than investing). If you'd like some objective, independent help with your investing decisions – as well as an analysis of whether it's enough to get you where you want to go – check out the fee-only planners of the Garrett Planning Network, who are now offering a limited-time 10% discount to Motley Fool readers. Just click on your state on the Locate an Advisor map, and look for the Fool logo for participating advisors.

Rule Your Retirement editor Robert Brokamp doesn't own any of the companies mentioned in this article, though he wishes he had spent $20 on Time Warner stock rather than tickets to the latest Superman movie. Coca-Cola is a Motley Fool Inside Value recommendation and a Motley Fool Income Investor pick. Electronic Arts and Whole Foods Market are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a solid disclosure policy.


Read/Post Comments (6) | Recommend This Article (9)

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  • Report this Comment On April 30, 2010, at 7:25 PM, militauro wrote:

    Very well written article!

  • Report this Comment On May 01, 2010, at 7:41 AM, Cookucletus wrote:

    $50/mo x 12mo/yr x 10yr = $6000

    ERTS got crushed

  • Report this Comment On May 01, 2010, at 7:58 AM, ragedmaximus wrote:

    if you put 30 dollars in coke you dont even get 1 share plus 10 dollar td trade cost so if you save 2 months you might get 1 share if it drops 20 percent ok ok i get the picture but this is real life investing with real costs

  • Report this Comment On May 01, 2010, at 8:04 AM, ragedmaximus wrote:

    ps coke appears in a small downtrend when it starts back up its a buy buy buy good for 58

  • Report this Comment On May 04, 2010, at 10:13 AM, oldfart139 wrote:

    Don't know how you got your return figure on WFMI. I bought some in 2005 at a split-adjusted price of $50.56, and more in 2007 at 40.21. So even with the comeback of the last year, I am down overall. Still hang in there because I like the compny (and its groceries) but stock is a loser for me.

  • Report this Comment On May 04, 2010, at 12:38 PM, ssssfs wrote:

    I think when you buy a cake and coke and one who buy cake as well as coke and kill him in a way of journey and many other are well managed and professional minus degree and positive degree of the earth and the sun. So sun micro systems are well cake coke.

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