Everyday Arbitrage: Please Mind the Gap

Author: Sibahle Magadla

Arbitrage: This is a French term I came across in my second-year macroeconomics class. Initially the term intimidated me, but the moment I finally understood what it meant in the context of currency markets, it’s a term I could never forget!

Basically, arbitrage is the practice of exploiting price inefficiencies for near-risk-free gains. In other words, arbitrage looks like buying an asset in one market at a lower price and selling it immediately in the other market at a higher price. This gives the investor a marginal income based on market discrepancies.

Put more simply, arbitrage is buying something from one place (books, clothing, information, furniture, tickets, etc.) and then reselling it for more than you bought it.

“When it’s raining gold, reach for a bucket.” Warren Buffet

Arbitrage manifests in various forms. For example, insider information yields arbitrage opportunities. Market information providers such as consultants use arbitrage to resell strategy documents to their clients. Likewise, South Africa’s very own financial fitness bunny, Nicolette Mashile, has a perspective (i.e. knowledge differential) on financing and investment from which she has developed a brand, endorsements and income. That is #informationarbitrage at work.

Another example is Instagram influencers. Instead of big brands paying large amounts of money for television or print advertisements, now they can partner with influencers who reach their target audience and advertise for cheaper! Influencers thus exploit arbitrage on social media to ‘advertise’ for a return (e.g. money).

Just recently, I went to a thrift store and found the bestselling novel “The Kite Runner” for R10. The book was still in great shape! I immediately thought to myself that I could buy more of these very cheap gently used books and resell to friends and also online – #retailarbitrage

Interestingly, in the event where an individual buys clothing or other goods at a very cheap location (e.g. China) and then sells in a more expensive market at a premium, this is known as geographical arbitrage. The American megastore Walmart is a classical case in point of this #spatialarbitrage

In a country like South Africa where currently the economy is not performing strongly, arbitrage can be applied by everyday people to create more value. Arbitrage treats challenges as opportunities, not as constraints. It is the reason why international traders tend to invest in developing countries: they recognize that the resource gaps provide an opportunity for them to provide a service or product which locals will definitely demand.

For instance, greater connectivity in South Africa allows us to tap into opportunities globally. Applications for Android and Apple which address resource gaps in education, health and infrastructure could be designed and sold to big organizations such as the World Bank. #technologyarbitrage

Furthermore, consider how French cuisine and culture (including the wines and champagne) have been positioned with so much flair. The French have even managed to create a tourism economy out of them. Moreover, Afrobeat music and dance from Nigeria and the Congo, which enjoy image advantages in their respective regions, are blowing up in Europe & the Americas!

I raise these points to say that we as South Africans could do so much more to take our cuisine, music, heritage, history, designs and perspectives to more profitable markets through the creative economy. #culturalarbitrage

Arbitrage simply starts with finding small inefficiencies (gaps) in the market that you could use to your advantage – and then exploiting price differences. Whether you’re unemployed, looking for a hobby (or secondary income source), or want to address a development challenge in your community, arbitrage presents endless opportunities to make profit. I therefore encourage you to go forth, fellow arbitrageurs!

References:

https://www.aacsb.edu/-/media/aacsb/publications/cds%20and%20dvds/globe/readings/arbitrage.ashx?la=en&hash=B78CC5EC6663C6D1F194795D4EE58E72D3516DE0

https://medium.com/@xragrawal/technology-arbitrage-research-in-the-west-and-implementation-in-the-east-45beb0a666d2

http://www.fao.org/3/x6993e04.htm

3 Responses

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