When I worked for Arnold Van Den Berg (Trades, Portfolio), one thing I really enjoyed was listening to him telling his life stories because they are so fascinating and inspirational. Van Den Berg is, without a doubt, one of the best storytellers in the world. But more importantly, I always learned something from his stories.
Today I’ll share the story of how Van Den Berg bought his first house, and the powerful investing lesson we can learn from his story.
During the 1970s, Van Den Berg spent much time studying inflation while inflation was running wild. After studying inflation and realizing what was going on, he knew he had to buy a house for his family. Therefore, one day, he told his wife that they needed to buy a house as soon as possible, otherwise they were never going to able to afford it because inflation was creeping up so rapidly.
There was only one problem: they had only five hundred dollars in savings. A decent house usually cost around fifty thousand dollars at the time, and the down payment was 20%. Realizing this, his wife said there was no way they could buy a house. However, Van Den Berg replied, “There’s a house out there for us. I have put it in my mind. We’ll find the house.”
So on a Saturday, Van Den Berg took his wife on a drive to look for houses. After checking out many houses, they couldn’t find one that fit all their needs. However, Van Den Berg had a feeling that there was a house out there, so after he drove his wife home, he continued his long search on his own.
He drove back to the neighborhood and all of a sudden saw a nice house that appeared to be for sale. It was clean and had a nice yard for the kids – the dream house Van Den Berg had imagined. Better yet, the price was very affordable. But there was still a problem – they didn’t have enough for the down payment.
Fortunately, in the 70s, assumable loans were available, which means that instead of putting 20% down, he could take the mortgage over and come up with the difference between the loan and the equity, which was much more manageable than putting down 20%.
Van Den Berg and his wife called their broker, who suggested that they could try to get the price down by a few thousand dollars more. To the broker’s surprise, however, Van Den Berg said not to bother, and that they'd take the ask price. The broker was perplexed, but agreed. The Van Den Bergs immediately paid five hundred dollars, which was all their savings, as a show of good faith. The deal was done.
Two years later, Van Den Berg sold the house for almost fifty percent more that the original buy price, but that’s not the end of the story. What Van Den Berg didn’t know at the time of buying was that the seller was going to put the house on multiple listing the next Monday. If he had listened to his broker to try to haggle a few thousand dollars more, the house would have gone into multiple listing and more people would have come and seen how good a deal it was. The Van Den Bergs would have missed out on the house as the price was bid up.
The lesson of the story is, when you get a good bargain, there’s no need to haggle. It’s not smart to try to squeeze more when you're already getting a good deal, because you're just as likely to end up watching helplessly as the price leaves the bargain range.
This lesson shaped the way Van Den Berg does businesses at Century Management. Whenever he knows he’s got a good deal, he never haggles. He thinks that the potential for a small extra gain is not worth the risk of missing out the deal.
Years later, I read Edward Thorpe’s book, "A Man for All Markets," and found something remarkably similar. Here is what Thorpe wrote in the book on the same subject:
“What the hagglers and the traders do reminds me of the behavioral psychology distinction between two extremes on a continuum of types: satisficers and maximizers. When a maximizer goes shopping, looks for a handyman, buys gas, or plans a trip, he searches for the best possible deal. Time and effort don’t matter much. Missing the very best deal leads to regret and stress. On the other hand, the satisficer, so-called because he is satisfied with a result that is close to the best, factors in the costs of searching and decision making, as well as the risk of losing a near-optimal opportunity and perhaps never finding anything as good again.”
Great minds think alike.
Read more here:
- What I Learned From Arnold Van Den Berg - Part 4
- What I Learned From Arnold Van Den Berg - Part 3
- What I Learned From Arnold Van Den Berg - Part 2
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