Warren Buffett famously said “Price is what you pay value is what you get”. Instinctively, he was talking about investing but realistically, this applies everywhere in life. Saving money is a great actionable step to take and all, but it only focuses on avoiding pain.
It is very difficult to lose when you don’t spend any money. However there are distinct instances where you should not focus on the price to optimize your finances. Instances where not spending money will make you lose over the long term.
It is no secret that quality over quantity can be a great guideline for making purchasing decisions. In some instances, focusing on quantity over quality is a better decision making process. However, the majority of the time, quality beats quantity every time.
This post will focus on the cases where quality of a purchase will beat the quantity of a purchase. Where buying more of a cheaper product will make you lose out in the long term than buying a more expensive product once. After all, price is what you pay value is what you get.
This line of thinking is one step above the usual personal finance mantra. After all, the community advocates for having a 50%+ savings rate, meaning that we should save as much money as we can. Therefore, if there’s a cheaper option we should go for it!
This line of thinking does work 80%+ of the time but it never works 100% of the time. Employing a tactic that works the majority of the time is a good way to live. However, it is important to think about the minority of the cases where it could affect you.
Therefore, to be 100% right, we can’t ignore the minority cases. Let’s explore it further.
Price is What You Pay Value is What You Get
On face value, Warren Buffett was talking about investments when he boldly claimed this. He argued that it’s better to pay a fair price for a fantastic business than a fantastic price for a fair business. In actuality, this is actually correct approach to take when investing.
Before I go further, please note I am not a financial advisor. Do your own research when deciding which businesses to invest in.
There’s very little chance that a mediocre business will generate big returns. There’s a very high chance that a fantastic business will grow and soar to heights you’ve never seen before. A quality business should outperform mediocre business over the long term.
What you give up, A.K.A. price, should be irrelevant. What you should be focusing on is what you gain, A.K.A. value. As a broad index fund investor, the vast majority of my money is tied up in index funds. However, I do follow individual stocks to invest in quite frequently.
There’s a very low likelihood that the company you are looking at is the only company offering that product or service. Therefore, you should always do a comparable analysis to see which other businesses are doing the same thing.
Then when comparing the two, focus on the future potential of the two, not the price. A friend of mine five years ago looked at Chipotle and saw that it was at $450 or so. He claimed “wow, that is expensive”. He never even considered the company and didn’t even take a look at how much the company earns.
Not even the strategy. He just looked at the price and thought it was way too expensive. That’s not the right approach and it never will be the right approach.
Besides Stock Investing
Aside from the “price is what you pay value is what you get” saying applying to investing, it applies to personal finance as well. Any purchasing decision that you are making should not focus solely on price. Price is one of many factors that should go into a decision making process.
It’s actually not even the highest priority that should go into a purchasing decision. It should be in the second highest priority. What matters is will the transaction better your quality of life than the alternative.
Below are a couple of examples of not to focus on price but rather than the value.
Price is What You Pay: Batteries
Batteries are the simplest example. When you go to a dollar store, never ever buy a battery from there. Dollar store batteries have been known to leak and damage devices. On top of which, they don’t last that long anyway so you would have been better off buying name brand.
Buying a dollar store battery 5 times for $5 that lasts a month total is worse than buying a name brand battery for $3 that lasts two months. Don’t forget the added cost of buying a completely new device if it doesn’t work out.
Never buy cheap batteries, always buy high quality and long lasting ones.
Price is What You Pay: Real Estate
When you’re a new real estate investor, you never focus on the price. The ultimate goal of becoming a real estate investor is to focus on cash flow. Real estate investors rarely place price as the top quality to look at. They ALWAYS place cash flow as the #1 priority.
The essence of real estate investing is that purchasing a house for $1,000,000 is completely fine as long as it brings in $10 – $20,000 a month. Why is that? As long as it cash flows, the purchase price is meaningless.
They understand that price is what you pay but value is what you get. As long as what you get is more cash flow than what you pay somebody else, everything is fine.
Price is What You Pay: Car
I advocate for spending as little money as you possibly can to get you from point A to point B. Now, that doesn’t mean you should spend $500 for a car that has 300,000 miles on it. You have to factor in maintenance charges that is bound to happen.
Salivating over a $500 car is only focusing on what you pay. Focusing on the $500 price tag plus the estimated $500 annual maintenance charges is the right way to go. In this case, what you are getting isn’t just to get from point A to point B. You are inheriting the headaches that come with the car as well.
What you are getting is a net negative so it’s a good idea to pass. The analysis applies to instances when you are winning on the deal as well as losing.
Price is what you pay value is what you get.
Spending Physically Hurts You
There is a famous study done by researchers are Carnegie Mellon, Stanford, and MIT. It stated that paying for something using cash physically tempers with the pain centers of your brain. Using an fMRI scanner, the insula that is responsible for processing pain, activated when consumers saw too high of a price.
That is one of the reasons why people focus so much on the price. They make decisions that will allow them to avoid the most pain. Instead of focusing on the most optimal decision. That’s not the right way to make optimal decisions.
This is a huge psychological bias to be aware of. In investing, we make decisions based on how to avoid losses. We do not make decisions on how to make gains. Losing money feels lower than the high felt when making money.
While it’s not a bad way to think in such a way, it’s certainly not a good way to live either. That’s why people focus so much on the price. Just thinking about what what they have to give up physically hurts them. Not in a figurative sense but in a literal sense.
It’s also one reason why people prefer paying with a credit card. I certainly do only pay with a credit card. I thought the reason was because credit cards offer rewards. The overlooked reason was that it actually does pain me to use cash to pay.
The Rule Applies Everywhere
Warren Buffett will be known as one of the greatest investors of all time. His legacy will be kept in people’s memories long after he is gone. If there’s one lesson to be learned from him, it’s that price is what you pay value is what you get.
When making a spending decision, it’s necessary to be aware of your own biases. Otherwise, we would be making suboptimal decisions and not even know it. Remember that a series of good decisions makes your life significantly better. A series of bad decisions makes your life significantly worse.
Before you leave, can I ask for you to SMASH that share button for the Google algorithm named BERT 😊 ? This rule isn’t a common rule as other investing rules so others can gain a lot from reading this article. BERT really likes it when people’s approach to investing is bettered so we don’t want to disappoint him!
Anyways it’s not a good feeling to one day wake up and realize you’ve been moving backwards. It’s time to start moving forward, onwards, and upwards. The point is to be at an optimal version of yourself, not suboptimal.
Investing is not the only avenue that the rule applies to but in everyday spending decisions as well. The cheapest solution can be the best solution but it’ll often be coincidental. Knowing how to capture, create, and get value is a learned skill to master.
Value is an crucial currency in the business world. The word will be thrown around more frequently than the word price. It makes the difference between good and bad, so might as well emphasize and make it a priority.
This is such an overlooked topic so I was glad to see you covered it David. So much of society will look at the price tag and not even consider the inherent value of the product itself. That example of the $500 car was a prime instance. Everyone should put in the effort and do their due diligence when looking at purchases.
Exactly. Price is one of many factors that should go into making a purchasing decision but very rarely should it be the most important factor. Not only does it apply to investing but it applies everywhere, when you’re at the grocery store or whatnot.