The Opportunity Cost of a Bosendorfer Strauss Grand Piano
It takes every ounce of my self control to avoid buying it, and every year that goes by, the future value of the investment opportunity cost gets lower and lower so I come closer and closer to doing it.
I’m going to teach you a financial technique that can help empower you to make informed choices about your own life and keep more cash in your pocket. I’ve been using it since college and it’s done wonders from my bank balance and investments.
From the time I was a kid and had only a few thousand dollars in the bank, I have wanted a Bosendorfer Strauss model grand piano, probably in a 7 foot size (which is comparable to a Steinway & Sons Model B semi-concert grand). Yet, the list price is $111,080 plus you’d be looking at sales tax of roughly $8,331 for a grand total of $119,411. As most of you know, I paid for college on a combined music and academic scholarship (vocal performance) and was able to test out of years of piano work, which freed up far more credits to take things such as graduate level finance courses and years of music theory composition. This is more than a hobby.
If I were to take profits out of my companies and the investments we’ve built up to buy one, what would the result be? Well, the average American business earns 12% after tax on book value. So, let’s presume that I become average overnight and our businesses never grow at more than that rate. (We are growing much higher than that but I want to keep the example simple without giving away too many details.)
The only other Bosendorfer grand piano model that gets me nearly as enthusiastic is the walnut and / or mahogany art case version. They look like they should be in the library of an old mansion, like in the movie "Clue".
Using something known as the future value of a single amount formula, which is one of the time value of money formulas, we can calculate how much “future” money I’d be giving up by spending the $119,411 today. Let’s say by the time I was Warren Buffett’s age. He’s 52 years older than I am. That’s 52 years of compounding.
We take 1.12 and raise it to the 52nd power. That’s 362.52. We multiply it by $119,411. The result is $43,289,395.
How Much Money Would I Be Giving Up by Buying the Bosendorfer Strauss Piano?
Now, Bosendorfer grand pianos are such fantastic instruments that for more than 100 years, they have typically appreciated at slightly more than inflation. Using a 4% rate, it’s fair to say that if maintenance were kept up and the piano rebuilt once or twice, it would have a liquidation value of $917,863 in 52 years. The difference, therefore, is $42,371,532.
In other words, if I reinvest the $119,411 in our businesses and earn 12% after taxes on that capital, I will have an extra $42,371,532 than I would if I took a dividend and bought a Bosendorfer Strauss model grand piano. The question then becomes, as badly as I want it, as much as it makes my heart sing with joy every time I look at it, am I willing to pay $42,371,532? This figure is called the nominal opportunity cost.
To be fair, let’s strip out inflation. At a 3% inflation rate over 52 years, we can use another formula (the present value of a single sum) and the answer is … $9,110,422. That is, $42,371,532 52 years from now will have the same purchasing power as $9,110,422 today. This figure is called the real opportunity cost. (“Real” in economics just means inflation-adjusted whereas nominal means non-inflation adjusted.)
The Real Question You Have to Ask Yourself
The real question – the one that I ask myself and the reason I have been able to be successful – is this: Am I willing to part with $9,110,422 in today’s dollars 52 years from now in order to have a Bosendorfer Strauss sitting in the office tomorrow? Time and again, I’ve answered the question: No. I already have a beautiful mahogany grand piano and I just cannot make myself write the check. I can’t do it. It’s not really about the piano, though, as you can tell. It’s about me teaching you how to use this technique in your own life.
Far from being sad or upsetting, this approach to life is empowering because I am making fully informed choices about my life. I know I could buy what I want, but I choose not to do so because I’d rather have the bigger amount in the future. Every year that goes by, the real opportunity cost drops because there is less time to compound. If I were in my 50’s, I’d just buy the piano now. But because I’m so young, everything changes.
The $40,000 Cashmere Sweaters from Ralph Lauren
By calculating what I was really giving up, I was able to make an informed choice about whether or not my life would be substantially enriched by owning two Ralph Lauren cashmere sweaters.
Using this technique makes life much more enjoyable. The first time I used it, I was shopping at the Ralph Lauren store in Princeton, New Jersey in my early twenties and wanted nothing more than to buy two beautiful cashmere sweaters. It was a beautiful fall day, the leaves had changed, the wind was blowing, and I was walking Nassau street. The two sweaters would have cost $800, which is far more than I had ever paid for anything at this point in my life (keep in mind, this is when I was still refusing to buy a car and spent almost no money on anything other than my goal rewards, such as the gold-rimmed coffee cups).
I did the math and called my parents on my cell phone, back in Missouri. They asked what the future value of the money I was giving up was, and I told them (it turned out to be $40,000 in real terms). Did I want these two sweaters badly enough now that I was willing to give up that kind of money in the future? Were those two sweaters worth giving up $40,000 in purchasing power during retirement?
They talked me down from the ledge, I put the sweaters down, and walked out of the store before I changed my mind. It was painful, but I did it because I made a choice about what I really wanted.
There Is No Right or Wrong Answer … It’s About Making Informed Choices In Your Own Life
There is no right or wrong answer. As long as I had no credit card debt, a savings reserve, and was investing regularly, there would have been nothing wrong with me buying the sweaters. The point is, you need to make a CHOICE. An active, fully informed choice so you know what you are giving up when you buy something. It is empowering. It is liberating.
And every now and again (like today), when it takes every ounce of self control not to jump in the car and go down to the local Bosendorfer dealer, I’m able to protect my pocketbook and wealth by redoing the calculation and saying the figures aloud to myself.
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