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.
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?