I’ve posted Entry #274 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuations Are 80 Percent of the Stock Investing Story.
Juicy Excerpt: How much would you say that price matters when buying a car? It’s certainly not the only factor. You need to be sure that a car is well-made. A poorly designed car is not a good deal even at a low price. And you need to be sure that the car you buy is one well-suited to your needs. Someone who desires a sports car will not be happy with even a well-designed family van. And there are lots of personal considerations that need to be taken into account. Some people like red cars. Some people like black cars. Getting the color right can add a good bit to your enjoyment of the car you buy.
Still, I think it can be said that researching prices and negotiating a good deal on price is 80 percent of what makes one a successful car buyer. Getting the color right is easy; you just need to be willing to drive to a second dealer if the first one you visit does not have the right color in stock. And it doesn’t take too much effort to identify the best style of car to satisfy your particular needs. We all know what is out there. You might need to check out a few vehicles to decide which particular sports car or which particular family van is right for you. But it is not difficult to get that aspect of the car-buying experience settled in your favor. Nor does it take much research to learn which cars have a reputation for being built well.
Getting the price right is harder. If you accept the dealer’s price, you are almost certainly going to overpay by hundreds of dollars and quite possibly by several thousand dollars. If you do enough research to enter the dealer’s lot with confidence that you know the fair market value of the vehicle that you intend to purchase, and are willing to invest the time and energy needed to negotiate a good deal, you are going to enjoy a huge dollar return for the hours invested. You can improve your car deal by thousands of dollars by working the price aspect of the matter, potentially turning a very bad deal into a very good deal by focusing on this all-important issue.
There is now 34 years of peer-reviewed research telling us that it works precisely the same way when buying stocks rather than cars.