Ah, the economics of gold-digging...
An awesomely hilarious post that’s been floating around Internet forums for a while now seems to be making its rounds again in varying versions.
To sum it up, a self-declared “spectacularly beautiful”, “articulate and classy” 25-year-old girl asked the always-sympathetic Craigslist community how to land a man with a minimum $500K annual salary in his back pocket.
To buy and to hold
The answer that earned this thread viral status supposedly came from a fellow named Rob Campbell of J.P. Morgan (supposedly).
He first divulged that he made more than $500K a year; then went on to describe why this “business transaction” was not one any savvy investor would likely sign off on.
“In economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates!” he began. “You're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. In Wall Street terms, we would call you a trading position, not a buy and hold.”
Ooooh - Wall Street terms! Fancy.
“It doesn't make good business sense to 'buy you' (which is what you're asking),” he continued. “So I'd rather lease.”
Oh, that poor (literally), spectacularly naive 25-year-old girl. The snobs of higher income might ridicule her ambitions, but alas - there’s a lesson to be learned amidst it all.
Depreciating assets vs. earning assets
Warren Buffett’s first rule of investing is to never lose money (followed by his second rule: don’t forget the first rule).
A depreciating asset is one that decreases in value over time. Usually, the cost of assets used to acquire a depreciating asset must also be factored in to determine its total loss to you.
For instance: your car, a depreciating asset, cost you more than the $25,000 price tag at which you bought it. The funds you put toward it could have been allocated to an RRSP account, for instance, where your money would have grown over time.
You might be able to sell it tomorrow, but certainly not for more than you bought it yesterday - and as the buyer might factor in the depreciating aspect of your car, you may not even get market value for it.
You might have done better to go the hipster route (and walk everywhere).
Ha, yeah right, you say. Okay, perhaps walking isn’t your cup of tea - but in areas where you can avoid sinking money into a depreciating asset, do your best to.
The economics of gold-digging
Mr. Campbell had it right when he said no millionaire - assuming they got there by making sound business investments - would willingly, in their right mind, sink their money into a depreciating asset. It’s simply not in the nature of their business.
We would suggest that, if this young lady really wants to strike it rich, she might do well to marry whatever money she does have into a million-dollar earning asset (and we’re not talking about a boyfriend).
How to marry a millionaire
Here are three tips to follow to get you closer to a million-dollar engagement without the gold-digging:
- Invest your money into earning assets, such as real estate that produces rental income, interest-bearing investments, and dividend-paying stocks.
- Learn the art of value investing (or talk to your advisor about it) when seeking out earning assets.
- Minimize the rate at which your depreciating assets lose value over time (for instance, by buying used clothes, used cars - used just-about-everything except used toilet paper).
No coyote ugly for you!
Sure, many of us need our cars for more than just getting around. We have whole families and businesses depending on our mobility. But when investing, it’s important to know when you’re looking at a depreciating asset as compared to an earning one.
You’d hate to wake up one morning and find yourself face-to-face with a depreciating investment that’s not only lost you money, but wasted your money’s earning potential.