By DAVID MOON, Moon Capital Management,
May 4, 2008
At the appropriate price, almost any asset can be an
attractive investment. Even a house on the wrong side of town, if priced
cheaply enough or offered on the right terms, would warrant the interest of an
astute real estate investor.
Never mind that every PTA, neighborhood
group or realtor has a different definition of the 'wrong' side of
investment is when you can buy an asset for 70 cents after already arranging to
sell the asset for $1. After you buy the asset, you immediately sell it
(sometimes without even taking possession), then pocket your easy money.
This is known as a
form of arbitrage, or (relatively) riskless profit.
opportunities can exist anywhere, but usually not for long. Investors see the
opportunity to buy $1 assets for 70 cents, and they bid up the price of the
underpriced asset until the arbitrage opportunity is gone.
That's why what
I'm about to tell you could mess up a sweet deal.
One of the
qualities necessary to succeed as an investor is an almost unnatural passion for
seeking out investment opportunities. A young analyst in our company certainly
has that. He also apparently has some time on his hands, which will become
trades on the New York Mercantile Exchange (NYMEX) for about $17 an ounce. My
budding silver tycoon has discovered that broken silver trinkets can
occasionally be purchased on eBay at the equivalent of under $12 an
To prove his
point, he showed me a plastic bag full of just-delivered miniature sterling
heart pendants and a broken baby spoon. I felt like I was holding the booty from
a drug deal.
He sent this first
shipment of silver stuff to a smelter in Michigan this past week, where the metal will
be melted, weighed and turned into cash for the benefit of this would-be Hunt
If you don't know
who the Hunt brothers were, look it up. I'm betting my guy has a much better
How much money
does he expect to make?
shipping, he's paid a total of $480 for goodies. He hopes, of course, that he
actually bought silver, and not some soft spray-painted rock.
Assuming $17 an
ounce for silver, after the smelter is finished smelting and taking its 12
percent cut, the gross profit should be $158. Then there will be $8 in shipping
All in, he expects
to make 31 percent (pre-tax) over 15 days. On a percentage basis, this is an
annualized return of about 75,000 percent.
In dollar terms,
he might clear $150. Again, before sending Washington their fair share.
Of course, he
didn't purchase all of that silver stuff in one single eBay auction. It took
four purchases to accumulate enough for him to send to the smelter. And it took
150 failed auctions for him to have four successful ones.
I may need to
check his Internet usage at work.
business is about identifying profitable investments while minimizing risks. The
ideal situation is, obviously, to be able to completely eliminate risk. Of
course, we can't compete in this silver arbitrage; we may not have Warren
Buffett levels of cash, but we need investment opportunities a bit larger than
But I'm anxious to
see how this little exercise in real-life arbitrage works out. I'll let you
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).