Investing Is Simple

By Jamie McSloy / January 31, 2018
investing arbitrage featured image

Investing Is Ultimately About Arbitrage

I have a friend who collects a particular luxury product. It costs thousands to buy, and it’s the sort of thing that – if it caught on – celebrities would be bringing out their heavily marked up designer branded labels.

In other words, it’s a product where the mark up is in the massive range.

Now, to hear him talk about his collection, you’d think he was just wasting his thousands. A lot of collectors are like that.

Here’s the thing though: What amounts to a weird interest is a pretty sophisticated investment strategy.

This guy knows exactly what the market value of every make and model is, as well as knowing what the market value was and what it’s likely to be. He’ll look at an item on sale and know whether he should barter, whether the particular brand has held its value over time and whether it’s getting rarer (in which case the value will go up.)

So, once when he was telling me about this collector habit, I immediately thought that the above behaviour is exactly like a trader or investor thinks about stocks or commodities.

But that’s not where the story ends.

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My friend was telling me about – and I’m not sure I should even mention this – how he bought one item with cash in one country, didn’t want to keep it particularly, so then hopped on a plane with it in his luggage and then sold it cash in the next country. For 15% above what he’d paid for it.

Inadvertently, he made a massive gain with no effort, and also avoided managed to use his item as an asset in different ways too: He managed to use it as a currency transfer mechanism and also as a tax-free transfer of wealth across countries.

This brings me to my wider point.

Where Do You Start With Investing?

There’s a simple way of looking at any investing.

You have an item. This can be anything from a pair of shoes through to a stake in a multi-billion dollar company.

Whatever object it is, you must first look at the value of it. What’s it ultimately worth?

This is what you can sell it for. This might not be the price. That doesn’t really matter yet.

Once you’ve worked out the likeliest value of the item, then you consider the price.

If it’s priced at $50 and you can sell it for $50, then you get no return. If it’s priced at $50 and you could sell it for $40, it’s a bad investment. When you can buy it for $50 and sell it for $60, then it’s a good investment.

That’s the basic thing… then you look at the history. Has the item been worth more? Is it on a downward trend or an upward one?

Essentially, you project into the future the likelihood of value. NOTE: This doesn’t have to be purely monetary. If you can take an item and it’ll be valuable to you in a time-return-on-investment or whatever, that’s great too. But I’ll keep this simple.

If the item is likely to go up in value then ultimately it’s a good investment because you buy it and it is worth more over time. This is what you’re looking for.

If there are added benefits, factor these into your calculations.

So What Should You Invest In First?

If you think of everything as a potential return-generating asset and store of wealth, then it becomes clear what you should start with, investing-wise.

It’s what you know about.

If you run a business and you know a new car will help you generate a bigger return, then it’s the best investment you can make at that time.

But outside of business stuff, you want to think about your hobbies, your geographical area and other things that you know deeply.

This gives you a) less risk and b) competitive advantage.

I’ve worked with a few wealth protection businesses. A big part of their business model is producing overseas investment opportunities for people with money to invest.

To make my point, which is better?

  • Investing in overseas property
  • Investing in some unused space opposite your house

Now, there are overseas investment opportunities. Some will bring excellent returns. But chances are you’ve got a higher likelihood of success with the latter option. You know the area and you have a better idea of the uses.

The same is true with your hobbies and careers. A bunch of people are on the cryptocurrency rollercoaster right now. IF this were limited to people who could read and understand the white papers, it’d be a thing.

But it’s not limited to those. It now includes hairdressers, car washers and retirees who need their grandson’s help to send an email.

These people are dumb and have “shiny object syndrome.”

They’d be better off thinking, “Hey, what do I know about the area I work in?” and putting their money into that.

 

Final Thoughts

If you work in tech, it’s better to invest in tech companies or put your money into tech things. If you’re an agricultural worker, then buy some vacant land and grow trees for lumber or whatever (it’s not my area, so you’re on your own.)

Too many people spend their entire days working on specific problems, learning useful knowledge and giving themselves competitive advantages in one field and then completely disregard that when it comes to reinvesting their money.

Investing is analysing the value of an object, comparing its price across history and then buying it at a cost which gives you the best chance of having its value rise until the send point.

Why would you make this quite-simple process more difficult than it has to be?

  • Anon1 says:

    This is an excellent and timely Article Jamie. I’ve always been about “invest what you know” and when i heard about bitcoin i remember thinking before “man i need to get in on something before it explodes out, and i need to keep my eyes peeled for when that happens”

    And then last autumn plays out, bitcoin starts skiing up everest. I see too many people talk about it, get emotionally affected and start thinking i need to invest in crypto to make massive gains. Because of all the singular stories i hear about early investors selling big.

    I start to think about which altcoin is underpriced and i can get an edge on so i can make a ton within 3 years.

    And then i do the best decision i’ve ever made: I don’t act.

    I don’t know shit about crypto, i don’t know the underlying mechanics, i have a very educated phd analyst friend who know cryptocurrency fundamentals better than me and even some of them have got burned.

    I got caught up in the collective societal emotion, from people i respect on twitter and elsewhere, i was going to invest in something i did not understand at all.

    And there’s a lesson in that. Throw emotions away when working with investing. Because if your mind is easily affected by the people you respect giving recommendations that you don’t understand, you should not invest in those recommendations.

    So your article really made me remember this. What am i good at? Not coding, not developing, not even really writing concisely.

    I’m good at understanding the emotions of others particularly female consumers, and redirecting it. I just gotta figure out how to make that a ethical marketable skill.

    Thanks

    P.s. really liking the ease of the new commenting system, what’s this plugin called? I might have to replace my disqus one on my site with this [as its less prone to interference]

    • Jamie McSloy says:

      Excellent comment Anon1,

      I went through a similar thing. I’d messed around with crypto because people asked me to work with it. Pulled it all out when I saw that it was going up into a bubble. Have stayed out for the reasons you suggested; I don’t know about it, I’m not comfortable and I’d rather put the money into building websites and putting money into stuff I understand better.

      That’s not to say crypto can’t make millionaires, but it’s not my thing and it’s a matter of time until I’d be losing out.

      Understanding female psychology is a big skill to have, and there are plenty of uses for it. What are you thinking of? Might have interesting info for you.

      As far as the comments – it’s Thrive Comments. I listened to your comment on getting this site more comment friendly, looked into Disqus but I’ve had troubles with it in the past (kept crashing the site and not playing nice with other plugins.) This came out while I was looking and seems to be a nice compromise. Most of the features. The only thing I’m waiting on is for them to add “Login With Twitter” option and it’ll be pretty much what I need.


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