In the Invest section of The Sunday Times today, four investors were featured on their investing habits. The fourth investor caught my eye because the habit of his that was highlighted had more to do with saving than investing but is nevertheless an important element in wealth-building.
Described as a one-time impulsive buyer, he has since learnt to rein in this habit. As he describes it:
[W]e bought things because we thought they were cheap and not because we needed them. Take a $100 item selling at 70 per cent discount. I now think: Does this save me $70, or am I just spending an additional $30?
One of the traps that many people fall into is in thinking that the market price of an item reflects its value. In actual fact, the market price only reflects the value of that item to the marginal buyer. It does not reflect the value of that item to all potential buyers unless the latter can resell it at negligible cost.
Unfortunately, many people get fixated on the so-called discount and get tempted to buy an item when an advertised discount is apparently large. The discount, as a result, has become a tool used by sellers to give buyers a misleading reference point to value the item. It is a tool that can be further misused when the so-called "normal price" from which the discount is calculated is actually not normally transacted at to begin with.
Still, some people are incorrigible bargain-hunters. The thrill of getting a good bargain provides them with psychological benefits. But as the investor featured in The Sunday Times points out, it is a benefit that comes with risks to one's wealth.
Buy enough bargains and you may go broke.
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