I went thrift-store shopping with Kris yesterday. I scored a pile of personal finance books, including a copy of The Only Investment Guide You’ll Ever Need by Andrew Tobias. This is one of my favorite personal finance books. Tobias has a witty, engaging style, and the book is full of down-to-earth tips.

Remember how cranky I was about Amelia Tyagi’s advice to not worry about the little things, to only pay attention to the Big Picture? Tobias has some great examples of why the little things matter, including this classic bit about how to make a phenomenal return on your investment by purchasing wine in bulk.

Earning 177% on Bordeaux
by Andrew Tobias

This example has sort of evolved. The first time I used it was in 1978, on the Tonight Show. Say you bought a $10 bottle of wine for dinner every Saturday night, but could instead get a 10% discount buying by the case. You’d “make” 10% the extra money you tied up. And you’d “make” it in just 12 weeks — a bottle a week for 12 weeks equals one case of wine — which works out, I explained, to “better than a 40% annual return.”

I didn’t explain how much better. I figured 40% was dramatic enough. Where else can you earn 40% tax free?

As the years passed, I found people were having trouble understanding this little shtick of mine. Why is it 40% if I just got a 10% discount?

So I tried explaining it in a little more detail. What actually happens, I explained, is that instead of going to the store and laying out $10 for one bottle, you are laying out $108 for 12 bottles (full price minus the 10% discount). The extra $98 is your “investment”. By keeping at most that much extra tied up all year, you save $1 a week on wine — $52 a year. And “earning” $52 a year by tying up $98 is earning 53%.

So now I was up to 53%, an even better tax-free return.

This confused people even more. That first $98 is gone, they would tell me, and now you have to come up with a new $98 to buy your next case of wine.

But think about it. If you were someone who planned to spend $10 a week on wine — $520 a year — and who would have LOVED to save 10% buying by the case but just couldn’t scrape up enough money all at once to do it, how much financing would you need?

Would you have to go to the bank and ask for a $400 loan in order to change your buying habits?

No, you would need only a $98 credit line — and you would only fully draw it down that very first week. After that, you would replenish it by $10 a week (the $10 you used to spend on wine by the bottle), which means that after 12 weeks, when you needed to buy the next case, you would not only have replenished the full $98, you’d actually have an extra $12 to work with (the money you saved buying by the case). So now you’d have to draw down only $86 of your $98 credit line.

In other words, to finance this change in buying habits you’d need to borrow a maximum of $98. But you’d only need to borrow that much the first week. Within 10 weeks you’d have paid the balance down to zero; then run it back up to $86 in th e13th week to buy your next case of wine; then paid that off in 9 weeks; then run it back up to $74 to buy your next case — and so on. On average, over the course of the year, you are using far less than the full $98 to finance this change in buying habits.

So the return on your decision to tie up that $98 at first, and then gradually less, is actually much greater than 40% to 53%.

If my friend Less Antman has keyed all this into his Hewlett-Packard financial calculator right — and I’ve never known him to err — it works out to an annualized 177% rate of return (though try explaining THAT in 40 seconds on the Tonight Show).

It’s still only $52 you’re earning — $1 a week by getting the 10% discount. But applied to all your regular shopping, it can be the best “investment” in your portfolio.

Next step: find a vintage you like equally well that’s only $8 a bottle.

So, you see? The little things do matter. The Big Picture matters, too, but you can’t simply focus on it at the expense of everything else. Keep everything in balance, and you’re well on your way to wealth. The Only Investment Guide You’ll Ever Need is a fun book, full of good advice. He maintains a daily weblog.

[Do try this at home.]

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