A few months ago I was lucky enough to find three sealed booster boxes of Dissension for sale at a local hobby shop for a great deal at $100 apiece, or $115 after taxes.
I quickly looked up eBay selling prices on my iPhone and confirmed that, indeed, I should buy them right away.
So I did. I sold them later that day for $150 each and made a cool $105 profit.
How long after I bought them did I have them sold? About 5 minutes. I walked from the initial point of purchase one block down the road to another comic book store and had them out of my hands immediately.
This is a story of arbitrage.
What is Arbitrage?
According to Wikipedia, Arbitrage is defined as:
… The practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flowat any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost.
While my example above did not fit 100% to the description due to the fact that I had to act as a broker (middleman) instead of having the exchange happen directly between the two stores, the fact that I had backed up my purchase by verifying profits to be made in another market (in this case, eBay) allows it to still fall within that category. It still followed the basic structure of:
- Find a product for sale at Market A
- Determine that you can sell it for more at Market B
- Buy from Market A and sell to Market B
- Profit! (Market $B - Market $A)
Seems simple, right? For our purposes… IT IS!
(Disclaimer: Yes yes yes… we could go on about the futures market, exchange traded funds, and imbalances in currency rates, but we’re talking small scale Magic Cards here, not the grain trade business. And this isn’t meant to be a hardcore economics class, just a primer.)
How Can I Get In On This?!
Odds are, you probably already are and may not even realize it. There are a few generalized examples that I can think of that we all probably already engage in.
Online Buying, Local Selling
How many of you visit sites like eBay or MOTL, purchase cards there, and then re-sell them in your own hometown for a tidy profit? The online world is a vast, global economy that presents products for sale from various regions around the world at prices that may differ from your local market.
When you purchase those 4x Stromkirk Noble for $16 online because you know that locally they sell for $6-7 each, you are indirectly performing a type of arbitrage! Granted, there was risk involved (what if no one wants to buy them when they arrive?), but by finding a buyer BEFORE you make the purchase, you will have achieved true arbitrage.
Next time you have that player complaining about how they are priced out of Legacy because the local B&M (Brick and Mortar) store is charging $65 for a Force of Will, there is no harm in asking: “Say, if I could get you a playset for $220… would you be interested?”.
If answer = YES, then:
Buy online for $200
Sell to Player for $220
(* = Minus any fees)
In this example there was NO risk, as you already had a buyer for the product you were bringing in. If you can get a few people's want lists completed all at the same time, there is a huge potential for profit. So ask around, see what people need and are willing to pay, and compare what you can get them for to determine if it’s worthwhile for you to buy it FOR them. With a tidy little cut for yourself, of course. 😛
Buy -> Sell Lists
Another common example of arbitrage would be something that the guys here at QS are always advocating… taking advantage of discrepancies between store buy and sell lists.
Since buy / sell lists are public, you can scour all that you want for opportunities and make a few quick dollars in the process! All it takes is for you to be at a convention and see Store A selling their Cryptic Commands at $8 and Store B buying at $10 for you to profit from this model. As long as one vendor does not sell out and the other vendor continues to buy, you can repeat this process ad nauseam until your cabal coffers are full.
MTGO is another excellent resource to follow this model. As you’ll primarily be dealing with bots, you can perform this buy / sell loop many more times in greater numbers.
In pure arbitrage fashion, if your LGS (Local Gaming Store) is buying boxes for X and you can get them through your connections for Y, there may be room to discuss making the orders FOR your LGS!
This doesn’t apply solely to boxes, of course… it applies to every aspect of business they may carry! Have a hook up for Perfect Fit card sleeves from Asia that they may not be able to order? If they want 100 packs for $3 each and you can get them for $2… that’s $100 (- fees) in your pocket!
Even if it’s just an occasional or one time purchase like in the Perfect Fit example, it’s worthwhile to build the business relationship for the future.
Trading in itself is a form of arbitrage. You and your trading partner can both be considered micro-markets, and the trade itself is an exchange of goods that results in loss, gain, or breakeven for one or both party members.
The wants/needs of the individuals will reflect the value of the goods being traded. And since an individual may value the goods more or less than the actual market, this allows us to profit due to the variance between perceived value and actual value.
We can take this a step further and actively solicit traders to determine their wants, trade for them from someone else, then re-trade them to the party who originally expressed interest for them to ensure that we make our “bottom line” in the deal.
This is especially useful when you find that one character who really, REALLY needs that 3rd Snapcaster Mage and you know someone who has one for trade at a lesser value than what your current partner is willing to pay.
Try and solidify a deal with a statement like: “Would you trade X for Y if I can get them for you? Could you hold Y for 15 minutes as I try and get you X?” There would be nothing worse than finally acquiring that Snapper just to have your original partner state that they no longer needed it.
Which bring us to…
Perils and Pitfalls
While arbitrage is an excellent business model, there are still risks and expenses involved that could cost you and/or the other party involved time and money. Be sure to bear in mind the following considerations:
1) Shipping costs
If you have to pay to get product from point A to B, ensure that the shipping costs are not greater than your profit. In our Force of Will example, it would be pointless to buy @ $200 and sell @ $220 if shipping was >= $20. I was actually just burned on this, as I’d promised to ship 2x Foil Tarmogoyf registered to Singapore from Canada. I was going to make $50 on the deal (- S&H), but it turns out registered shipping cost me $45. Curse your antiquated postal system Canada Post!
So I made $5 and considered it a lesson learned…
2) Auction Fees & Customs
Along the same line of shipping, if your fees are going to be greater than your profit, that defeats the entire purpose of the purchase.
3) Market Fluctuations & Changes in Demand
If the cards you’ve ordered increase or decrease in value while waiting for them to arrive, you could make a little more, but you are mostly concerned with the risk of losing. If we really want to have 0% risk, I advocate on solidifying a deal before ordering when this is a route that you’re taking.
Going back to the 4x Stromkirk Noble for $16 example: if, by the time they actually arrive in your town, the market for them has dried up or local values have come into line with the global market, you’ll have a hard time selling them for profit if you didn’t already have a pre-existing deal with someone. Cover your bases!
YOU are the one acting as a middle man. YOU are the one responsible to ensure that the end users are happy.
The onus of safe delivery lies on YOU, and no one else. So while there is much profit to be made, it would be at YOUR consequence should something go wrong. If you accept someone’s $24 for those Nobles ($6 each) and the price spikes to $8 each when you go home to buy (cost now = $32 instead of $16), YOU are the one out that $8 ($32-$24) + shipping and fees.
A Free Lunch?
There is no such thing as free money. And while arbitrage is a nice way to protect your capital, it does come with its own risk and reward matrix like any other business venture. I hope that the tips and tricks that we’ve discussed today not only help you in your Magic deals, but also open your eyes to the vast possibilities that exist outside our cozy little niche market.
Hope you had a great New Years, everyone! Glad to see you here in 2012!