The Story of Mr. Buyer and Mr. Investor
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Here’s a tale of two people: Mr. Buyer and Mr. Investor. Mr. Buyer lives paycheck to paycheck because he likes to spend it all. He also likes to brag about his purchases to his best friend; the soft spoken Mr. Investor, who smiles as he listens to his boisterous friend talk about what he bought, the brand, how much was spent, and where he bought it from. Let’s run through some dialogue and talk about the subsequent consequences of each.
Way back in November of 2001, right after Mr. Buyer and Mr. Investor became friends, Mr. Buyer and Mr. Investor exchanged the following dialogue:
Mr. Buyer: Hey! I just bought this cool new device! I spent $400 on it!
Mr. Investor: Ok.
Mr. Buyer: Aren’t you interested in what it is?
Mr. Investor: (Smiling) Sure. Tell me. Be sure to include the company that made it.
Mr. Buyer: (Thinking Mr. Investor is weird) Um…ok. It’s an Apple (NASDAQ: AAPL) iPod. You can download and store music on this device and you don’t need Windows to run it.
Mr. Investor: Ok.
Mr. Buyer: I am going to be “bad” walking around with this device!
Mr. Investor sat there and thought about Mr. Buyer’s enthusiasm for the new device. He decided to research Apple and saw that it wasn’t faring too well in 2001. However, he saw that it did do well in the previous two years. Mr. Investor knew that Steve Jobs wasn’t a dummy. He reasoned that the iPod would probably take off, but instead of buying his own iPod Mr. Investor decided to use his $400 to buy some shares of Apple.
According Yahoo Finance, Mr. Investor’s single investment of $400 dollars transformed into roughly $21,943 as of this writing!
Mr. Buyer continued to enjoy his iPod until the next one came out. He then purchased that one and every new one after that. He eventually bought every generation of the iPhone and iPad that came out as well.
Mr. Investor smiles quietly as he looks at his stock brokerage statement. Mr. Buyer still lives paycheck to paycheck.
Fast forward to 2007 and here we have another important dialogue between Mr. Buyer and Mr. Investor.
Mr. Buyer: Hey Investor!
Mr. Investor: (Startled by Mr. Buyer’s sudden outburst) What is it?
Mr. Buyer: I saved some money…
Mr. Investor: Finally.
Mr. Buyer: …and bought a four wheeler.
Mr. Investor: (Disappointed) Oh. What kind is it?
Mr. Buyer: A Polaris (NYSE: PII) Outlaw.
Mr. Investor: (Halfway paying attention) An outlaw stole your money???
Mr. Buyer: No. Listen. A Polaris Outlaw, the most wicked four wheeler around.
Mr. Investor: Thanks for the info.
Mr. Buyer: (Wondering why he hangs out with his weird friend) Um...ok.
Mr. Investor decided to research Polaris. He read about how Polaris makes and sells ATVs, snowmobiles, and motorcycles. He saw in 2007 that the company was struggling a bit with sales growing 7% and profits remaining essentially flat. The investor decided to take the long term view and figured the company would pull through.
It did pull through with revenue and free cash flow growing 49% over the next three fiscal years. His $1,000 investment tripled to roughly $3,350 over the next four years.
Mr. Buyer enjoyed his four wheeler while living from payday to payday.
The next time the two friends meet Mr. Buyer talks about gifts for his girlfriend:
Mr. Buyer: I bought my girl a handbag from Coach (NYSE: COH). Man, it was expensive, costing $600.
Mr. Investor: A Coach handbag, interesting.
Mr. Buyer: Yes. The high prices were interesting too.
Mr. Investor: High end prices?
Mr. Buyer: Very much so.
Mr. Investor thanked him for the info and went home to research this company that gets away with charging such high prices. He noted that Coach was a “marketer of fine accessories and gifts for men and women.” He saw Coach’s excellent fundamentals (chart below). In seven years from 2000-2007 Coach grew its revenue and free cash flow 376% and 937% respectively, resulting in a 1,027% return for its shareholders.
Mr. Investor as an inside joke decided to invest $600 in Coach at the beginning of 2008. Over the next five years, Coach’s revenue and free cash flow grew another 82% and 63% respectively. The stock price rewarded Mr. Investor with a 100% return doubling his investment.
Two months later Mr. Buyer’s girlfriend broke up with him. Mr. Buyer still lives paycheck to paycheck.
Now it’s the winter of 2010. During a blackout Mr. Buyer gets bored and decides to go over to Mr. Investor’s house.
Mr. Buyer: (Sitting in the dark) I’m going to buy a Generac (NYSE: GNRC) generator so I can have some lights and power to run my Internet and use my iPad to do some online shopping. You can’t rely on the power grid anymore. When the power goes off, it stays off for a week or two at a time.
Mr. Investor: You’re right. I’m going to buy one too.
Mr. Buyer: You’re actually going to open your wallet and buy something?
Mr. Investor: Yep. I can save thousands of dollars in spoilage by running the refrigerator. I can also gain access to the Internet, which enables me to earn money as a financial blogger. The purchase of a generator is really an investment in disguise.
Mr. Buyer: You mean I’m investing too?
Mr. Investor: Well…this time.
After buying the generator in December 2010, Mr. Investor got online and discovered the company just went public, which means he would be getting in close to the ground floor. He reasoned the increasing occurrences of lengthy power outages would mean increased demand for generators over the next 3-5 years. On Dec. 31, 2011 he decided to invest $5,000. Since then Generac has given its stockholders a 102% return turning his $5,000 into $10,100 in 23 months.
The dialogue above may seem rather silly and retrospective, but it proves a valuable point. Spending money generally means buying something that goes down in value to the point of it being worth zero. Investing means buying assets, such as stocks, bonds, and real estate, which have the potential of increasing in value and making you rich. Mr. Investor will mostly likely become a rich man giving him options not available to the person living paycheck to paycheck. When you make a purchase, what will the purchase price compound to over a number of years if invested in a stock instead? Are you a buyer or an investor?
stockdissector has positions in Apple mentioned above. The Motley Fool owns shares of Apple and Coach. Motley Fool newsletter services recommend Apple, Coach, and Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!