Archive for March 28th, 2005

What are we investing in?

Maybe it’s that I’m attending a finance class this week, but I’ve been doing some thinking about fashion and investing—specifically, the idea of investing in one’s wardrobe.

I’ve seen too many articles about buying Investment Pieces, such as the Hermes Birkin or Kelly bag. In these articles, overly simple cost per wear (CPW) calculations inevitably ensue:

If you wear your leather Birkin 250 times per year for 5 years, you can divide the initial $6500 cost and get a CPW of [$6500 / (250 x 5)] = $5.20.

At $5.20 per wear, the Birkin purchase appears to be comparable to the purchase of a cheap party bag you can get at Ross for $10.99 and wear only once or twice before it starts showing wear and tear. Indeed, that $10.99 bag, worn twice, earns you a CPW of $5.49—twenty nine cents higher than that of the Birkin.

Is it fair to say that the Birkin is a better value, using this simplistic calculation? I say, no.

The large capital outlay required to purchase the Birkin has an opportunity cost, not to mention the years long waitlist that you’d be required to endure to get the bag. The opportunity cost? In financial circles, opportunity cost is simply the worth of the most valuable alternative. Or in simpler terms, opportunity cost asks you to quantify the value of whatever else you would have otherwise done with the money. If you would have, for example, paid off school loans instead of buying the Birkin, the opportunity cost there would have to include the extra loan interest you now would have to pay. Not to mention the intangible cost of not having the peace of mind from being debt-free.

Furthermore, the simple amortization calculation also neglects to account for salvage value, or the amount of money you can get for the item once you’re done with it. Factoring in salvage value can significantly decrease CPW values, especially when the market for pre-owned items is hot, which is true in the case of Birkins. Just check eBay. A salvage value of $4000 for the aforementioned example Birkin would decrease the CPW to ($6500-$4000)/(250*5) = $2. Because Birkins are in such high demand and have such a long waitlist, it’s even possible for the salvage value to exceed the initial cost of the bag, resulting in a negative CPW—or an actually profitable investment.

For a back of the envelope calculation, this is all fine and good. But aren’t we missing something by only focusing on the numbers? I don’t believe that the majority of us stylephiles go shop, even for so-called Investment Pieces, because we believe they will make us money. In any case, most pieces would have a poor Return on Investment (ROI) that would likely lag that of competing investment options.

By focusing solely on the numbers, we’re missing what I believe to be the most important part of the equation: how does the item make you feel?

We’ve all heard the saying that “Money doesn’t buy happiness.” Well, a very smart person once shared with me an amendment to that saying: “Money rarely buys happiness. So when you see an opportunity to buy happiness with your money, run out and take it!”

When I was fourteen, I fell in love with a beautiful 60s inspired cashmere-wool coat. With three oversized buttons and the perfect rounded collar, it truly channeled Audrey Hepburn’s classic tastes. And its three-quarters length and its delicate tailoring flattered my small figure and short stature perfectly. But at $500, it was far more than just a splurge. After all, at fourteen, I had no source of sustainable income, and child labor laws and my relative lack of skills prevented me from working. Long story short, I eventually did get the coat—after three long months of begging. I’m still, however, paying for the coat by my mother’s incessant nagging (e.g. “You spend too much money on clothes. You’re going to have to live at home when you’re forty just like George Costanza from Seinfeld.”). I also got cut off from buying clothes at sixteen.*

All nagging and clothing embargoes aside, I’m glad that I put my neck out on the line for the coat. I didn’t just love that coat, I Loved it. And it makes me so happy that I still wear it to this day.

So when you fall in love with a ridiculously extravagant item—or really any item that Calls to you, think of the Money-Happiness Amendment of 2005. If it makes you truly happy and won’t cause you financial ruin, I encourage you to take the plunge and invest in your own happiness. You’ll be glad you did.

* My reaction to the Clothing Embargo of 1999? I ended up working at the Macy’s at Stanford Shopping Center. The jean wall on the second floor of the Men’s store still haunts me. And to this day, I tidy up after other customers at the mall as I shop. Force of habit. I did, however, get complimented on my folding skills at Banana Republic last month!

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