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Wednesday, September 1

Success = Not Overpaying

Yesterday I talked about passive recurring income being the single best method for gaining financial independence. Complementary to that is always obtaining goods and services at a fair price. This means two things:

  1. I pay for quality. There are two types of purchases - commodity-type purchases where you truly are looking at price as the distinguishing feature and value-driven purchases where you are looking for "bang for your buck." If I'm buying baking soda, I will generally buy it for the lowest price possible. It's not like some companies dilute their baking soda - I'm getting the same end product regardless of the price I pay. On the other hand, if I am in the market for a durable item, such as furniture or a car, I will pay for something that I expect will last me a while.
  2. I look for opportunities where price and value are not equal to one another. This is more important than #1 because your cost basis of an investment determines the return you achieve. Buying shares of stock in a company for 75% of their intrinsic value is the kind of opportunity I'm talking about here. Or another example, buying a foreclosed condo for $18,500 when others are selling for $65,000. I actually did this, and it feels great!
Too often consumers and investors overpay. Once you've paid too much, you've sealed your fate. If it's not a commodity (like baking soda), spend some time evaluating your options. Then, stand firm and don't overpay. If someone else is willing to pay more for the foreclosed home than you thought you should spend, let them. Another opportunity will present itself. Just be patient.

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