Arbitrage Everything
The term arbitrage evokes puzzled or confused looks from most people who have never worked in or studied finance. Even the google result for the search ‘define arbitrage’ yields a result that clearly displays the finance connotation of the term. However, if you’ve ever purchased something that you thought was underpriced with the intent of reselling it (a pair of shoes, a game console, or a limited edition multi-appendaged sex toy) then you have engaged in arbitrage. You bought something you knew was underpriced, and the word “knew” captures the idea I want to convey here, informational asymmetries exist everywhere. In other words, you know things that other people do not. If you choose to seek out and leverage these informational advantages, opportunities abound.
There is a large online community formed around the idea of “dropshipping” which involves moving a listing from an online store to another online store at a higher price. When the item sells, you simply order it from the first store, send it to the customer, and collect the difference in price. When I explain this business model to people, the responses are nearly binary: “that’s f***ed up, you’re stealing people’s money” or “show me how to do that.” I take issue with both knee-jerk reactions for different reasons, but I see the negative response as more problematic.
What those responding negatively are assuming is that the person collecting the arbitrage provides no value to the consumer. They see dropshipping as a scam and don’t understand how it could be a profitable practice. What these skeptics fail to recognize is that there is an information arbitrage occurring here. Some people know where to find products for their cheapest price online and some people do not. This skill seems like a basic proficiency to most Millenials because we understand that the easiest way to solve most problems is to google it. However, there is still a large population, that types with both index fingers and has no idea that Amazon exists. By listing Amazon items on Ebay for a higher price, you are making them easier for these technology dinosaurs (sorry Dad) to find. Amazon to Ebay arbitrageurs are providing a valuable service and in the long run, they will be responsible for closing the gap between the prices of items online by boosting supply on the higher priced sites (drives price down)and increasing demand on the lower priced sites (drives price up).
I want to impress this basic idea upon you: arbitrage opportunities exist EVERYWHERE! Contrary to what your economics teacher might have attempted to convince you of, financial markets are no different. Some actors have more accurate analysis of information than others. Some actors have the perspective that in the long run certain activities or a process will be more successful than others. Warren Buffett provides a shining example of how having a disciplined system can significantly outperform the market over a long time period. Warren Buffett arbitrages patience. He values patience very highly so he employs it constantly. The market values patience extremely cheaply because long term secular trends are not sexy and easy to rally people around emotionally. Ironically, Warren Buffett’s success in patience arbitrage has been so massively stunning, he has actually brought a bit of sexiness to the method of patient value investing.
I want to close this little think piece out by hopefully putting some of you onto the absolute king of arbitrage, Gary Vaynerchuk. Garyvee, as he is more commonly known, continues to make a name (and a sh*t ton of money) for himself by buying consumer attention where it is underpriced. I can’t do his content justice because I don’t want to attempt to encapsulate his accomplishments or forward thinking in a few lines. I encourage anyone who has read this far to check out Gary’s content, it’s top notch.
If you agree, disagree, love me, or hate me please let me know! Feel free to send any feedback publicly or privately. If you just want to bounce ideas about arbitrage opportunities off me I’m always down. As the kids say, it goes down in the DM folks.
-Brad
