The Worst Investment You’ll Ever Make!

We have written in length about making good investments – in equity markets, in bond markets, mutual funds and in our own selves too. But every one of us at several stages in our lives make some terrible investments too – bad career choices, bad relationships, bad financial investments and so on. Amongst them, there is especially one that we will all end up making and that is buying a car!

There is no way you could have missed one of those memes that goes like this – “If you’d bought Tesla stock instead of a Tesla Roadster 10 years ago, this is how much money you’d have now”.

Image Courtsey : hardbacon.ca

While Tesla owners often justify their purchase for the sheer thrill and joy of driving the electric car, it doesn’t change the fact that buying that brand new, fancy, shiny & glittery, Tesla Roadster in the first place was a bad financial decision. To quantify just exactly how big a hole a car purchase puts in our finances, we analyse data coming from over 30,000 cars listed for sale on CarDekho.com’s website. CarDekho sells second-hand cars in India and the data from their website on age, mileage, model and price gives us the best hope of being able to quantify value depreciation and the consequent wealth destruction effect that a car purchase has.

Let’s dive in…

CarDekho’s database of second-hand cars

We shamelessly scrapped CarDekho’s website to capture some key datapoints from all the cars they have listed for sale on their portal. Our dataset looks like this.

Some of the columns are obvious on what data they contain. For the others, here is a legend

  • Myear – Model year, this is the year the car was bought.
  • Km – Number of Km driven at the point of listing for sale
  • Pn – Price New, this is the price when the car was new. This data is only available for about 1000 of the 30,000 cars.
  • P_numeric – Price second-hand, as listed on CarDekho’s website
  • isExpiredModel – FALSE if the model is still in production and TRUE otherwise
  • views – The number of times each of those cars listed for sale were viewed on CarDekho’s website.

We use Python to sift through the data and tell us the story behind the numbers. Here are our findings.

Unsurprisingly, Maruti Suzuki cars are the most widely sold second-hand cars in India

Of the 30,000+ cars we analysed, the most frequently available car was the Maruti Swift. If you are looking to buy a second hand of one of those, you have plenty of options available to choose from. About 1374 to be precise across the country as of last week. The second highest by listing on CarDekho’s website was the Hyundai i20. The full list of the top 10 models and the number available on CarDekho’s website as of last week looks like this.

If you are after exact model variant and the top 10 available by each of those variants, here is the list.

The largest second-hand market is for cars from Maruti Suzuki and perhaps to some extent Hyundai as well. In a country filled with value buyers where most new car purchases cost on an average less than 10 Lakhs, this trend is entirely unsurprising.

Unsurprisingly, prices decline as the car gets older

You know this just as well. Cars lose value as they get older. But the depreciation trend is different across different cars. Some cars lose more value than others do. You have probably heard your dad talking about ‘re-sale value’. The cars that depreciate the least have the highest re-sale value – at least that is the popular household theory. Here is a chart showing depreciation trends amongst some of the most popular models.

Here is a similar chart showing depreciation of some of the most popular model variants.

In both cases, you should be able to notice that the depreciation curve is not a straight line but is a curve which rapidly falls down on the left and flattens towards the right. This tells you that cars lose a lot of value when they are new and lesser and lesser value as they become older.

The Winner of the LEAST DEPRECIATION CONTEST is … Toyota Innova!

Now, that should be a surprise. It was to us! We ran a linear regression of prices against number of years used and total Km run by each model. Our regression results tell us that luxury cars lost the most amount of INR value each year (We don’t need regression to tell us that. But regression tells us precisely by how much each year). An Audi-Q7 for instance depreciates at the rate of Rs.4.9 Lakhs per year. BMW 7-series is a close second. Now, our results gave us mixed results when it comes to value lost per 10,000 Km driven. But this is because mileage and years used are correlated with each other (when years used goes up, mileage typically goes up). And when there is correlation between two regression variables, the results can be a bit off. So, ignore that for a moment. Here are the top 10 cars that lost most value per year when in use.

Here are the bottom 10 models by value lost. Some of these models are expired models, but they are still in demand and their price depreciates by less than Rs.1,000 per month.

These tables should help you make one of the biggest decisions in your lives about a car purchase. Can you afford to lose Rs.4.9 Lakhs per annum in depreciation? If the answer is no, you shouldn’t be considering buying an Audi. What is the maximum amount you can afford to throw away? The answer to that question should guide you in making a purchase decision.

While those tables are relevant, they are not entirely useful because there is a huge price variation between a BMW 5-series and Maruti Alto. And obviously, a BMW will lose a lot more in INR value per year than Maruti Alto. The right way to compare them both is to look at value lost as a % of the average model price when new. And those results aren’t as conclusive. Here are the top 5 models that lost the most value per year as a % of their average model purchase price. Skoda often touted to be an extremely reliable, fuel-efficient car, lost the % most value per year.

The bottom of that same list looks like this.

There must be an economic rationale to this. Perhaps it has to do with demand and supply. Or perhaps it has to do with popularity of each model. But there is the data for you to interpret.

What cars do people want the most?

Given these results and our conclusion that luxury cars lose a lot of value, it should be obvious that people who make good financial decisions will want to buy lower priced cars that depreciate the least per year, perhaps in the Maruti suite of cars. And this may well be true. To verify our hypothesis, we ran an analysis on the ‘views’ column to check which models had the highest average page viewership on CarDekho’s website. And the results of that are here.

The most viewed cars are mostly luxury cars! Our aspirations sometimes far outweigh our financial prudence!

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P.S: Data comes from CarDekho’s website. For letting the world stealthily scrap their website, please consider checking out some of the second-hand cars they have listed for sale. And always buy second-hand if you can, new cars lose value a lot quicker than second-hand cars.

Disclaimer: None of this should be considered as financial advice. I drive a BMW 520d and it is the worst investment I have ever made. But she is a beauty to drive 🙂

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