Investing Contest: Pick the Biggest Loser

“Have you ever noticed that anybody driving slower than you is an idiot, and anyone driving faster than you is a maniac?” – George Carlin


Michael Mauboussin has an interesting test to see if there’s any skill involved in an activity (versus being mostly luck).  Basically, if you can lose on purpose, then there has to be some skill involved.

This comes to mind when I see a newspaper or financial publication that runs a stock picking contest. They usually last 3 to 6 months, at the most, which is basically a crap shoot. The best performing stock wins.

I think it would be interesting to see one where contestants have to pick the worst investment. The biggest loser would be the winner (not as easy as you think as sometimes the worst looking stocks perform the best or the best performing stocks continue their upward momentum – this is why short-term trading is nearly impossible for 99.9% of us).

It’s not a stock, but if I were to enter this made-up contest, I would just buy a brand new car (I make the rules for the biggest loser contest so I’ll allow it).

According to Edmunds, a new car loses 11% of its value the moment you drive it off the lot.  After the first year a new car depreciates by about 20%.

So after 2 years a car is worth about 70% of the price you paid.  It goes down in value roughly 10% a year from there.  Following the 5th year of ownership, a new car has depreciated to roughly 40% of the original value for a 60% loss.

When you add in the cost of fuel, car insurance, state fees, financing, and maintenance, the cost of owning a car can be much larger than you think.

Kelley Blue Book shows that the 5 year cost of owning a $19,000 car is close to $36,000 including out of pocket expenses and the loss in value.

Some estimates place car expenses at 20% of household budgets. For lower income households it can be closer to 40%. Cars can be a huge drain on your finances.

Obviously, you can’t sacrifice buying a car unless you work in a city with great public transportation or live really close to work.

There are a few options to consider that can make your driving experience less of a money drain.

According to Edmunds, you could save up to $9,000 by buying a 1-3 year old used car instead of the brand new model.

You can use this to your advantage by buying 1 to 2 year old cars that have been previously leased. Many of these cars will still have the factory warranty. Look for cars with less than 20,000 miles so there isn’t a ton of wear and tear.

The dealerships will perform an inspection on the car to make sure everything is in working order and you can request a free Carfax report to make sure there haven’t been any huge problems with the car in the past.

Another plus is that the dealership will detail the interior to give the car a semi-new feel. You don’t get the new car smell but saving 20-30% should be enough compensation to get over that fact.  Buy the new car air freshener for $5 at the gas station if you really care.

I know I just made a strong case to never buy a new car, but there is an exception. It could end up being a smart purchase if you buy a high quality vehicle that will last you a number of years.

That way you can drive the car for a few years after it’s completely paid off so you don’t have any car payments. If you take out a 4-5 year car loan and drive the car for a minimum of 9-10 years in total it could be a wise decision.

Once you pay it off you can funnel your car payment funds into retirement savings or a future car savings fund. Theoretically you could almost pay for your next car in cash (depending on auto inflation) if you take out a 5 year car loan and then drive the car for 5 years after its paid off.

Cars are so high quality these days it’s not out of the ordinary to see them last 10-15 years as long as you take care of them with routine maintenance.

Some people out there feel that they absolutely have to buy a new car every 2-3 years.

Research on the subject shows that there is no relationship between the Kelley Blue Book value of your car and the enjoyment of driving it on a regular basis (they tested car prices ranging from $400 to $400,000).

New cars do not make people happier.  While it might feel great when you take the car for a test drive, the novelty eventually wears off.

Do you enjoy your driving experience when you’re stuck in traffic on the way home from work?

Obviously, there are some car people out there that do receive some enjoyment from their ride.

I’m fine with people spending money on themselves, but make sure you have the rest of your financial house in order before buying the newest model every year.

Sources:
Happy Money
How fast does my new car lose value? (Edmunds)

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    • Ben commented on Feb 02

      Thanks for the link. Interesting results. You’d think it would be easy to pick the worst stocks, but it’s not so. Especially since stocks generally rise over time.

  1. Johnny Ray Gay commented on Feb 08

    Sent this to my brother. We all need to be reminded from time to time of the high cost of spending money on depreciating assets -especially cars!

    • Ben commented on Feb 08

      Yes, good way to put it. This is especially true for those that have problems saving money. Savings should take precedent over a new car.