Update No. 243 – 27/11/15

Solid week of performance for the fund leading to another new high mark. Better than this, is news giving the sense that the intrinsic valuation of a number of our larger holdings is running away from share price. Good things eventually follow when this is the case.

This week I will write about cars. I disposed of my vehicle Thursday, giving me cause to think about these horrific money-pits and the untold damage they can cause people. Not the physical harm, but the breathtaking financial harm.

Don’t get me wrong, I enjoy driving. I will be in Italy in January and have been considering hiring a Ferrari to drive for perhaps half a day around Rome. Just for the experience mind, were I a billionaire, I don’t think I could justify the cost in my life. But for a few hours at a reasonable price, I think it would make a memorable experience.

The financial harm I refer to comes primarily in the form of depreciation. There are also running costs to consider, but depreciation is where the major harm is caused in vehicular ownership.

In discussing the sale of my vehicle this week, I had cause to speak to few people about car ownership and came away somewhat horrified at how people view the ownership process. I had one fellow (a smart, successful fellow I should note) explain to me that you really need to replace your car every couple of years, because the tax deductions after the first couple of years aren’t large enough. Think about that for a moment… The thing you’re deducting from your tax is the decrement in the value of the asset you own. Depreciation is a very real cost. Given the choice of paying an extra 37 cents in income tax (I am guessing this fellow falls in the $80-180k income range) or losing $1 in depreciation to save 37 cents, I’ll pay the tax!

I sort of enjoy the fact people are so cavalier about depreciation because I do exploit this in order to minimise the harm vehicles cause to my own wealth. To give you an idea of how, I always buy my vehicles at auction, and I am very flexible about what I walk away from the auction with. I will buy virtually anything that sells at a deep discount to what I assess to be its private resale value, and falls loosely within my own vehicular needs (late model, relatively inexpensive to own/insure, Mrs Hansen prefers automatic transmission etc.). I used to ‘flip’ my cars fairly regularly and for a few years, virtually eliminated depreciation costs from my life, but the time spent at auction and in the sale process also has a value & I expect I will turn my vehicles less and less frequently, and consequently accept at least some depreciation cost creeping into my financial life.

The vehicle I disposed of this week, I acquired in May 2012 for $23,200 (Subaru Liberty Premium, with quite high specifications). It was the best and most expensive vehicle I’ve ever owned, which should help you understand how thrifty I am. The vehicle was 14 months old when I acquired it and had travelled about 45,000 kms. After 3.5 years of ownership, and having added 75,000 kms, I disposed of it this week for $15,000. The buyer got a good deal, it is a very good car that has been well cared for and will give them many years of reliable service I would wager. I would be surprised if they weren’t able to sell the vehicle in about 3 years for at least $10,000 if they’re a disciplined seller and care for their asset.

So consider this, when it comes to the car I disposed this week:

• Owner 1 paid $41,270 sold 14 months later for $23,200. Annualised depreciation rate $15,490.
• Owner 2 (Me!) paid $23,200 sold 3.5 years later for $15,000. Annualised depreciation rate $2,340.
• Owner 3 (my estimate) paid $15,000 sold 3 years later for $10,000. Annualised depreciation rate $1,670.

On the schedules as laid out above, I reckon ‘Owner 2’ is the place to be. The vehicle still felt very new, was covered for the first couple of years under the manufacturer’s warranty and yet didn’t cause me to suffer too badly financially.

In terms of personal finances, my Wife & I could certainly afford to take a larger hit to operate our vehicle. $2,340 for annual depreciation is less than a small fraction of one percent of the family balance sheet annually.

It is in this way I think most people would be advised to think about their vehicular ownership – how much do the depreciation and operating costs harm your overall wealth? I had another young fellow explain to me that the monthly repayment on his (very expensive) vehicle ‘only’ consumed 15% of his income. ONLY?

Particularly when you’re young, the money you can avoid spending (i.e. save) is very valuable. If you intend to retire at 65, the dollar you don’t spend at 25 is worth 17 times the dollar that you don’t spend at 55 assuming only a 10% rate of return. Or 66 times more if you assume a 15% rate of return.

As Benjamin Franklin said, “Beware of little expenses, a small leak will sink a great ship” and “A penny saved is a penny earned”. A very great effort is placed by young folk on growing their earning capacity. The very same thing could often be achieved by stripping excess costs. I think I’ve explained before in these pages that “A penny saved” is actually far more valuable than a “penny earned” because you won’t pay tax on the dollar you don’t spend, but you will on the incremental dollar you earn.

I will be attending auctions next week to replace the sold vehicle. It may no longer be the most expensive vehicle I’ve owned, but whatever I buy, you can be sure the first owner will have paid a much heavier price than I do in terms of depreciation – Tony Hansen 27/11/2015

EGP Fund No. 1 Pty Ltd. Up by 6.39%, leading the benchmark by 7.36% since July 1^st 2015. Since inception, EGP Fund No. 1 Pty Ltd is Up by 97.55%, leading the benchmark by 62.47% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}