WEBVTT 1 00:00:00.000 --> 00:00:05.760 But the more I thought about this concept, the more I realized that all businesses are 2 00:00:05.760 --> 00:00:07.440 vitrosh. 3 00:00:07.440 --> 00:00:12.360 And how much you want to make, and the extent to which you crush it, will be dictated 4 00:00:12.360 --> 00:00:14.560 by how big the arbitrage is. 5 00:00:14.560 --> 00:00:17.340 Welcome to the game where we talk about how to get more customers, how to make more 6 00:00:17.340 --> 00:00:20.600 per customer, and how to keep them longer, and the many failures and lessons we have learned 7 00:00:20.600 --> 00:00:21.600 along the way. 8 00:00:21.600 --> 00:00:23.600 I hope you enjoy and subscribe. 9 00:00:23.600 --> 00:00:24.600 What's going on, everyone? 10 00:00:24.600 --> 00:00:29.440 I'm going to be talking to you about one of my favorite topics, arbitrage. 11 00:00:29.440 --> 00:00:35.080 And so the first time I heard this word was actually in a fancy dinner I was sitting 12 00:00:35.080 --> 00:00:38.400 at, and I was like, I don't know what's going on, and these dudes and finance were talking 13 00:00:38.400 --> 00:00:40.240 about derivatives and crazy stuff, right? 14 00:00:40.240 --> 00:00:46.160 And they just kept saying arbitrage, and I was like, what does that mean? 15 00:00:46.160 --> 00:00:49.120 And they were like, oh, it's like when you just take advantage of an inefficiency in a 16 00:00:49.120 --> 00:00:50.120 marketplace. 17 00:00:50.120 --> 00:00:53.280 And I was like, how? 18 00:00:53.280 --> 00:00:55.560 And so then they explained it to me. 19 00:00:55.560 --> 00:00:58.940 And they were like, well, it's sort of like when you go on eBay, right, and you can buy 20 00:00:58.940 --> 00:01:04.140 something for $5, and then you can take the same thing and then just go into Amazon and 21 00:01:04.140 --> 00:01:08.120 sell it for $50, well, that would be a big example, but you get the idea, where you buy 22 00:01:08.120 --> 00:01:13.960 it for $5, and you sell it for $50, and it's because there's inefficiency in a marketplace 23 00:01:13.960 --> 00:01:17.280 where there's, that's where the arbitrage happens, right? 24 00:01:17.280 --> 00:01:24.440 And so the definition of arbitrage is where you buy in one market, right, at one cost, 25 00:01:24.440 --> 00:01:31.520 and then you sell in another market, at another cost, so you sell high, and you buy low, 26 00:01:31.520 --> 00:01:32.520 pretty simple, right? 27 00:01:32.520 --> 00:01:33.520 Everyone understands that. 28 00:01:33.520 --> 00:01:34.520 That makes sense. 29 00:01:34.520 --> 00:01:38.560 And here's you in the middle making all your money, being happy, yay, there's you, all right? 30 00:01:38.560 --> 00:01:41.560 So that is basically what arbitrage means. 31 00:01:41.560 --> 00:01:48.440 But the more I thought about this concept, the more I realized that all businesses arbitrage. 32 00:01:48.440 --> 00:01:53.880 And how much money you make and the extent to which you crush it will be dictated by how 33 00:01:53.880 --> 00:01:56.160 big the arbitrage is, right? 34 00:01:56.160 --> 00:02:00.740 Even if you think about basic business, a service business, you're buying labor in the 35 00:02:00.740 --> 00:02:04.280 labor market, this is market one, this is why this is important, is that you're buying 36 00:02:04.280 --> 00:02:07.000 and selling between different markets, right? 37 00:02:07.000 --> 00:02:10.400 This was a point of nuance that I didn't understand when they first told me how this worked 38 00:02:10.400 --> 00:02:14.720 and I also didn't want to ask because I was embarrassed that I didn't know what I meant. 39 00:02:14.720 --> 00:02:17.800 So hopefully you can watch this and not be embarrassed if someone says it, all right? 40 00:02:17.800 --> 00:02:22.960 So market one and market two, so there's inefficiency, this little line here is the inefficiency 41 00:02:22.960 --> 00:02:25.720 between the marketplace, what you're buying at and what you're selling at, right? 42 00:02:25.720 --> 00:02:26.720 Right? 43 00:02:26.720 --> 00:02:31.000 And so market one can be a labor market, you're buying labor at X price and you know that 44 00:02:31.000 --> 00:02:34.680 you can sell the labor at another price to market two, right? 45 00:02:34.680 --> 00:02:36.440 And then that's how you make a profit. 46 00:02:36.440 --> 00:02:39.040 But every business fundamentally works this way. 47 00:02:39.040 --> 00:02:43.560 I can buy from a manufacturer for a dollar and sell it over market number two for five 48 00:02:43.560 --> 00:02:44.880 dollars, right? 49 00:02:44.880 --> 00:02:50.920 Now and even the manufacturer buys from raw ingredient producers who buy it from farmers 50 00:02:50.920 --> 00:02:53.520 at one dollar and sell it for five dollars, right? 51 00:02:53.520 --> 00:02:57.360 And so that's the game that continues gets played between market one and market two. 52 00:02:57.360 --> 00:03:04.600 And a supply chain is literally a series of markets in a row of markets buying and selling, 53 00:03:04.600 --> 00:03:07.160 buying and selling and buying and selling and then the person in the middle of the business 54 00:03:07.160 --> 00:03:10.680 owner is technically arbitraising all of these things, right? 55 00:03:10.680 --> 00:03:11.680 Right. 56 00:03:11.680 --> 00:03:12.680 Okay. 57 00:03:12.680 --> 00:03:16.360 Now here's where I think this is interesting. 58 00:03:16.360 --> 00:03:19.960 There are two, so take this concept, pocket it in your mind for a second. 59 00:03:19.960 --> 00:03:23.720 And so one of the concepts that I've tried to explain, and I'm partially making this 60 00:03:23.720 --> 00:03:27.280 video so that I can, I know that I learn things better when I teach them, all right? 61 00:03:27.280 --> 00:03:31.040 So it's the difference between economic profits and accounting profits. 62 00:03:31.040 --> 00:03:36.760 If anyone took economics, if you did, right, then they would talk about this. 63 00:03:36.760 --> 00:03:39.520 And the difference, I'll start with accounting profits because it's the, it's the easier 64 00:03:39.520 --> 00:03:40.520 one to understand. 65 00:03:40.520 --> 00:03:43.080 They're not hard to understand, but it's the easier one, all right? 66 00:03:43.080 --> 00:03:49.040 So economic profits versus accounting, accounting profits are revenues minus all costs, right? 67 00:03:49.040 --> 00:03:51.480 That is an accounting profit, right? 68 00:03:51.480 --> 00:03:56.360 That's what most of us do when we do our tax returns, that is an accounting profit. 69 00:03:56.360 --> 00:03:58.600 Simple, everyone should understand that one. 70 00:03:58.600 --> 00:04:06.360 An economic profit is where you take the revenue minus the explicit cost of doing business, 71 00:04:06.360 --> 00:04:11.480 and then you also subtract out the opportunity cost, which is the implicit cost of using the 72 00:04:11.480 --> 00:04:18.120 resources that you have in that particular market or path versus another opportunity. 73 00:04:18.120 --> 00:04:20.000 So let me give you an example. 74 00:04:20.000 --> 00:04:24.920 Aimos in Asian quick break, just to let you know that we've been starting to post on 75 00:04:24.920 --> 00:04:27.240 LinkedIn and want to connect with you, all right? 76 00:04:27.240 --> 00:04:30.280 So send me a connection request and note letting me know that you listen to the show and 77 00:04:30.280 --> 00:04:31.520 I will accept it. 78 00:04:31.520 --> 00:04:34.700 There's anyone you think that we should be connected with, tag them in one of my or 79 00:04:34.700 --> 00:04:37.720 layless posts, and I will give you all the love in the world. 80 00:04:37.720 --> 00:04:42.760 All right, so let's get back to the show. 81 00:04:42.760 --> 00:04:47.280 So let's say you own a paper mill, right? 82 00:04:47.280 --> 00:04:50.320 And your company owned a forest, and that's where they cut the trees out, and then they 83 00:04:50.320 --> 00:04:51.840 turned it into paper, right? 84 00:04:51.840 --> 00:04:52.840 Simple. 85 00:04:52.840 --> 00:04:58.240 Now the economic profits of that business, the opportunity cost that would be factored 86 00:04:58.240 --> 00:05:02.240 into that economic profit, is whether or not you could make more money just selling 87 00:05:02.240 --> 00:05:03.560 timber, right? 88 00:05:03.560 --> 00:05:06.720 Or selling sawdust or selling wood. 89 00:05:06.720 --> 00:05:10.080 Those would be different examples of things that you could do with the existing resources 90 00:05:10.080 --> 00:05:14.760 you have, which is this guy in the middle here, he's got resources, he's got people, 91 00:05:14.760 --> 00:05:18.920 he's got maybe equipment, skill sets, talent, etc. 92 00:05:18.920 --> 00:05:25.400 That if he were to apply those skills to a different market, he could then make more 93 00:05:25.400 --> 00:05:26.400 money. 94 00:05:26.400 --> 00:05:29.680 And that is the difference between economic profits and accounting profits. 95 00:05:29.680 --> 00:05:32.840 And the reason this is important to me, as an entrepreneur, is that when I'm looking 96 00:05:32.840 --> 00:05:37.320 at what I want to get into, right, with things that are interesting to me, or for investing 97 00:05:37.320 --> 00:05:42.160 because I invest in businesses now, which is kind of wild to me, but anyways, is that 98 00:05:42.160 --> 00:05:48.360 I'm looking, is this given these resources of humans and skills and equipment and software 99 00:05:48.360 --> 00:05:54.840 and everything, we're currently pursuing arbitrage opportunity A, right? 100 00:05:54.840 --> 00:06:03.400 But what if, with these same skills, I could have arbitrage opportunity B, where I'm buying 101 00:06:03.480 --> 00:06:09.240 in this market for rock bottom prices, and there's another market over here that is paying 102 00:06:09.240 --> 00:06:11.560 top dollar, right? 103 00:06:11.560 --> 00:06:16.040 So between the first example I have, where it's a normal amount of money that's being made, 104 00:06:16.040 --> 00:06:22.160 compared to this arbitrage opportunity, I would want to be in this one, right? 105 00:06:22.160 --> 00:06:25.840 Now what's going to dictate, whether or not it's going to be one of these markets versus 106 00:06:25.840 --> 00:06:31.080 one of these markets, well, the growth of the marketplace, overall, there are growing 107 00:06:31.080 --> 00:06:34.680 markets, like online fitness is a growing market, right? 108 00:06:34.680 --> 00:06:42.240 And so it means that there's likely going to be arbitrage, a greater degree of arbitrage, 109 00:06:42.240 --> 00:06:44.320 because there's going to be more demand. 110 00:06:44.320 --> 00:06:48.760 And so if I can find markets where I feel like there's more demand for the same things 111 00:06:48.760 --> 00:06:52.640 that I can buy cheaply, then I want to go to those things. 112 00:06:52.640 --> 00:06:56.000 And so when I'm thinking about all opportunities, because I think that that's one of the biggest 113 00:06:56.000 --> 00:07:00.120 superpowers that we have to have as entrepreneurs is not, sure, like right now, I could go and 114 00:07:00.120 --> 00:07:01.120 run a gym and make money. 115 00:07:01.120 --> 00:07:05.160 I could, I could also run a massage parlor and make money, I could also run a supplement 116 00:07:05.160 --> 00:07:06.160 company and make money. 117 00:07:06.160 --> 00:07:07.160 I do that too, right? 118 00:07:07.160 --> 00:07:09.360 I could run a lot of different businesses to make money. 119 00:07:09.360 --> 00:07:12.840 But of all the opportunities under the sun, of all the different ways I could make money, 120 00:07:12.840 --> 00:07:19.000 which is the best given my resources skills talent team, et cetera. 121 00:07:19.000 --> 00:07:21.880 And then if I look at all of those things on a board, these are the things that we're 122 00:07:21.880 --> 00:07:23.920 absolutely amazing at. 123 00:07:23.920 --> 00:07:27.680 And these are the different arbitrage opportunities that exist. 124 00:07:27.680 --> 00:07:32.680 Each of these arbitrage opportunities, we best fit for the skills, talents, traits, 125 00:07:32.680 --> 00:07:34.960 team, et cetera, that I have. 126 00:07:34.960 --> 00:07:38.800 And then by answering that question, we'll inherently answer the very important question, 127 00:07:38.800 --> 00:07:41.400 which is, what can we be the best in the world at? 128 00:07:41.400 --> 00:07:45.240 And so I think for me, this has been a really valuable concept to understand is that all 129 00:07:45.240 --> 00:07:50.440 businesses arbitrage, it all functions off of an information advantage between the buyer 130 00:07:50.440 --> 00:07:52.280 and the seller. 131 00:07:52.280 --> 00:07:56.480 The bot, sorry, the seller always has the information advantage or many times has the information 132 00:07:56.480 --> 00:07:57.960 advantage. 133 00:07:57.960 --> 00:08:03.640 And so fundamentally, when you find out that an iPhone costs $17 to make, people are shocked 134 00:08:03.640 --> 00:08:04.840 by this. 135 00:08:04.840 --> 00:08:09.920 But that's because there's obviously other costs besides the manufacturing, obviously. 136 00:08:09.920 --> 00:08:14.800 But all big businesses run off of extraordinary degrees of arbitrage, right? 137 00:08:14.800 --> 00:08:19.440 Facebook is able to have eyeballs and sell eyeballs at a significant amount cheaper than 138 00:08:19.440 --> 00:08:22.280 it costs them to manufacture them, right? 139 00:08:23.120 --> 00:08:27.400 Verizon, it costs them pennies to add another user to their base. 140 00:08:27.400 --> 00:08:30.840 And so the reason this is important for me to at least express is that for a very long 141 00:08:30.840 --> 00:08:35.600 time, when I was, when I was earlier on in my career, I had these weird morals and ethics 142 00:08:35.600 --> 00:08:37.480 around how much more I could charge for something. 143 00:08:37.480 --> 00:08:39.640 And the reality is, there is no limit. 144 00:08:39.640 --> 00:08:41.680 It is simply based on the market demand. 145 00:08:41.680 --> 00:08:45.520 And so whether it costs you a penny to make something that's worth $1,000 or a cost 146 00:08:45.520 --> 00:08:49.840 you a penny to make something worth two pennies, that price that you charge should never 147 00:08:49.840 --> 00:08:54.880 be in any way relation to what it costs you and only related to what the market will allow. 148 00:08:54.880 --> 00:08:58.760 And then it's up to us, his entrepreneurs, to look at which arbitrage opportunities exist 149 00:08:58.760 --> 00:09:02.280 between marketplaces that best fit our skill sets. 150 00:09:02.280 --> 00:09:06.880 And by doing that, we will then find ourselves in the best opportunity vehicle for us to grow 151 00:09:06.880 --> 00:09:09.800 in the long term and probably make the most money. 152 00:09:09.800 --> 00:09:11.720 So anyways, I hope that was valuable for you. 153 00:09:11.720 --> 00:09:12.720 I hope this made sense for me. 154 00:09:12.720 --> 00:09:15.640 This is the topic that I love talking about. 155 00:09:15.640 --> 00:09:17.960 And I hope that you find value in that. 156 00:09:17.960 --> 00:09:19.800 And otherwise, have an amazing day. 157 00:09:19.800 --> 00:09:21.640 I'm rooting for you, keeping awesome. 158 00:09:21.640 --> 00:09:25.200 Leave a like, comment, or review, or any of your subscription or subscribe or tap the 159 00:09:25.200 --> 00:09:26.200 button or all this stuff. 160 00:09:26.200 --> 00:09:27.200 Keeping awesome. 161 00:09:27.200 --> 00:09:28.200 Catch you soon. 162 00:09:28.200 --> 00:09:29.200 Bye.