Game Blog: Applying Dollar Cost Averaging to Collecting

The P-Cult is CulturePopTV.com’s Business Editor and op-ed columnist. In his installment series, “The Business of Collecting,” he offers business insights for pop culture events, collector markets and relevant industry and sector analysis.

The P-Cult also currently works as an advisory consultant, focusing on finance and accounting process improvement and business strategy within the retail and consumer products sector. He has worked for three of the top four consulting firms in the world and maintains several professional certifications.

The P-Cult holds three degrees in accounting, corporate finance and accountancy.

 


 

Every collector has a story about how they overpaid when they first started collecting. Some collectors continue to overpay because they can’t wait to play a specific game or watch a certain movie on Blu-ray. In my case, I overpay for convenience.

As I previously mentioned in “Price Lags in the Video Game Market“, I often travel for work. Sometimes, I’m asked to travel to the middle-of-nowhere or places with bad weather. So, if I know that I’ll have some downtime coming up, I might buy a game or movie. Often, there isn’t enough notice to shop around for a great deal, or enough time to wait for shipping. In those cases, I’ll bitethe bullet and purchase an overpriced item.

So why is overpaying okay? Well, it’s really not. However, there’s an easy way to lower your purchase price even after you’ve already bought the item. It’s called dollar cost averaging.

“[T]here’s an easy way to lower your purchase price even after you’ve already bought the item.”

Dollar cost averaging is a technique that allows investors to commit to a certain amount, for a particular investment, on a regular schedule, regardless of its share price. A greater amount of shares are purchased when the price is low, and fewer shares when the price is high. This results in a lower average cost per share.

Let’s apply this concept to a purchase of the classic puzzle game, Tetris on the Nintendo Entertainment System. Although this example is specific to a game, the technique is applicable to any collectable that transacts at a reasonably high volume (ie. Blu-rays, DVDs, toys, comics, etc.). Looking up the price for a loose cart on eBay, it appears to be going for $7.97 plus $2.45 for shipping, totaling $10.42. If you were to visit a certain local retro video game store in Westerly, RI, you would see that there are quite a few copies and they each sell for $7 cash. If you bought one at that price, you’re average cost would be $8.71 (($10.42 + $7.00) / 2). You’ve just brought your average cost down by $1.71 by (believe it or not) spending more money. If you buy two copies at $7, you’d lower your average cost even further to $8.14 per cart. The more copies you buy, at the lower price, the lower your average purchase price becomes.

“[T]he technique is applicable to any collector’s item that transacts at a reasonably high volume (ie. Blu-rays, DVDs, toys, comics, etc.).”

I’m sure you’ve realized that there’s virtually no chance you’ll bring your cost per cart down to $7. However, the premium of $1.14 (your average price, $8.14, less the lowest price, $7) is essentially what you paid for convenience. Which, in this scenario, was the ability to play the game before you purchased the lowest priced copy.

Now, even though you’re paying a premium, there is still a way to lower it. We can achieve this through the sale of the cart.

Since having more than one copy of Tetris is pretty much useless, lets discuss selling price. You may have heard the phrase “buy low, sell high.” Well, this isn’t always an option. Luckily, you can still make money buying high and selling low. Sounds crazy, right? But its true!

“[Y]ou can still make money buying high and selling low. Sounds crazy, right? But its true!”

If you were to sell the first copy that you purchased on eBay, you may think that you’d be losing money if you sell it for less than $10.45. However, when you apply dollar cost averaging, you would be lowering your purchase price if you sell any cart for more than $8.16.

So even though you purchased your first copy at $10.45 you can sell it for, let’s say $8.20, and actually lower your average cost to $8.13. This, in turn, lowers your premium to $1.13.

Lastly, its important to note that this doesn’t have to only apply to one collectable at a time. This practice can apply to your entire collection at once.

Hopefully this all makes sense to you, but if not, let me know by leaving a comment. There are a few concepts (inventory methods, etc.) that I left out for brevity but if you’re interested, feel free to contact me at the email address below.

 

– The P-Cult

 

Be sure to read to read the next article in The Business of Collecting series, “Opportunity Cost of Collecting”.

 


You can contact The P-Cult with further questions or comments at thepcult@gmail.com. Also, don’t forget to check back at CulturePopTV.com for the next installment in The Business of Collecting.