Ever since publishing my post on getting rich by predicting the future, I’ve been trying to think of more money making ideas. After all, it’s much better making tons of money from an investment than working for a living so you can relax, avoid rush hour traffic, spend time with your kids, travel, exercise, buy anything you want, and live a longer and happier life!
Despite the post receiving 50,000+ pageviews, only a handful of you actually offered any predictions and ways to profit from them. What’s up with that? The one solution I’ve found to coming up with more investment ideas is to look at all our missed opportunities and learn why we didn’t pull the trigger. Let me share two such opportunities that cost me over $1,000,000.
Missed Investment Opportunities
One of my largest financial regrets was not buying Seattle and Portland area property over the past 10 years. I had been consistently visiting both cities every quarter to see clients from 2001 – 2011 and marveled at how much cheaper their real estate prices were compared to San Francisco’s.
One client relocated to Portland with a different company and made the same amount. He was able to buy a mansion for $400,000 after only being able to afford renting a one bedroom in SF. Seattle and Portland are quite similar to San Francisco in terms of topography, weather, diversity, and lifestyle, yet their property prices were trading at a 70%+ discount. It seemed unsustainable.
I knew in my heart of hearts that buying Seattle and Portland property was a no brainer because I foresaw capital flight out of the expensive Bay Area into those cities. It was only logical that regular SF Bay Area homeowners would eventually cash in on their million dollar shacks and retire in a much lower cost area with great similarities. Further, technology made working in a specific location less necessary.
Over the past 10 years, Seattle and Portland property prices have exploded. They have consistently lead the nation in rising property prices due to the reasons I stated. It’s also helped tremendously that Amazon, Nike, Starbucks, and a bunch of other smaller companies based in those areas have seen their market caps grow immensely as well.
Unfortunately, I didn’t invest because the idea of being an absentee landlord of a $400,000 property felt like too much work, even though I believed $400,000 could turn into $800,000 within 10 years! Totally illogical for me not to do anything.
Coming up with a $80,000 downpayment and carrying a $320,000 mortgage for $1,400 a month was totally doable for me at the time. But I was uncomfortable buying something for $400,000 I wasn’t 100% completely familiar with. I should have just tacked on several days after a business trip to check out as many properties as possible. The $80,000 downpayment would be worth $500,000+ today if I had just made the move.
Today when I look up a real estate deal on Fundrise, they’ve got pages and pages of information about every investment laid out in six tabs: Overview, Financials, Property, Market Summary, Management, and Documents. I can check out all the pictures of the investment. I can also go on Google street view to get a virtual tour of the surrounding area. I can do more research online and talk to friends who live in the area.
Finally, I don’t have to invest $400,000 cash in a project or go through all the paperwork of getting a loan. I can just invest $5K – $25K to gain exposure on an investment opportunity that is already pre-vetted. They won’t just except any type of deal on their platform because they have a reputation to care about.
Real estate crowdsourcing has made investing in other areas of the country so much easier now. I wish it existed back in 2003 when I seriously started considering investing in Portland and Seattle. I may not have made a 6X return due to the lack of leverage, but I would have wisely allocated capital in an investment I felt strongly would increase in value.
REITS are a good way to get overall real estate exposure and real estate crowdsourcing is a way to surgically press on areas that may have the most upside. I’m sure there are neighboring cities or states that are benefitting from another city or state’s robustness. This is part of the reason why I invested $10,000 in the Conshy, Pennsylvania commercial real estate deal. The Philly area seems to be doing well based on all my research.
Here’s how I might structure a $1,000,000 investment portfolio as a 40-year-old man with three dependents and a stable job paying $250,000 a year.
$600,000 stocks (DVY, VTSAX, EEM)
$200,000 bonds (TLT, IEF, MUB)
$150,000 REITS (VNQ, O)
$50,000 RE crowdsourcing (Alabama multi-family property, Nashville retail property)
Within each category one can decide on the various types of investments. But overall, this portfolio is a classic 60/40 portfolio equities/fixed income portfolio. In the past, there wouldn’t be this reasonably small 5% allocation in real estate crowdsourcing. But now that the industry is gaining momentum, I can see hundreds of millions of new investment dollars being allocated towards the space.
Arbitrage opportunity: The ability to mobilize capital much more freely is the reason why historically undervalued areas of the country may start to catch up with real estate prices in more expensive coastal cities, especially as coastal city property prices take a breather. The key is to invest in those undervalued markets that may attract the most amount of new capital. I’m willing to do the work to potentially earn a higher return given I don’t see as much opportunity in the S&P 500 anymore.
Arbitrage Opportunities Everywhere
Buying property in Golden Gate Heights was a specific arbitrage opportunity because it was trading at a 40% discount to the eastern and northern part of San Francisco. Buying like-for-like Seattle or Portland property was an arbitrage opportunity due to their 70%+ discount to San Francisco. But what other arbitrage opportunities are there?
There is an investment category called merger arbitrage where an investor tries to capture the spread differential between where a company says they will takeover a company and where the company is trading before, but usually after the announcement.
For example, let’s say Disney announces they will buy Twitter for $26 a share, a ridiculous $6B, ~50% premium to its current share price. TWTR will immediately pop to probably ~$24 a share, but not $26 a share. Why? Because things fall through all the time! You might have an ego war between Twitter CEO Jack Dorsey and Disney CEO Bob Iger about roles after the merger that may delay closing.
You might see the government ban the acquisition due to anti-trust reasons. Or, you might have material information that comes out after the takeover announcement that may hurt Twitter’s valuation. If you can correctly forecast everything going through, you would buy Twitter stock all day long at $24 and make a 7.7% return once the deal is done.
But even the most sophisticated merger arbitrage investors will look to hedge their positions by shorting a derivative security. In this example, shorting Salesforce, one of the rumored suitors, would have been a profitable trade.
Here’s a table showing the overall performance of a basket of 36 merger arbitrage funds since 2012. 2015 was a good year, but not so much for the rest. There are even merger arbitrage ETFs such as MNA, MRGR, and CSMA. Merger arbitrage is a harder space to successfully outperform.
Career And Pay
Too many people are too scared to earn what the market is willing to pay. They aren’t willing to jump ship out of loyalty or fear of confrontation. They aren’t willing to relocate because relocating is a PITA. They aren’t willing to spend hours doing research to see what other people with similar careers earn to ask for a raise. As a result of these fears, arbitrage opportunities emerge!
I’m a good example of not optimizing my career before I left. I only worked for two firms after college. I lasted for two years at the first one in NYC until I took an opportunity to make more money with a higher title in San Francisco. That turned out to be a good move because 75% of my class in NYC no longer had jobs after the dotcom bust. But then I stuck around for 11 years at my last firm! Despite knowing that I probably wasn’t going to last much longer than 10 years during my ninth year at the firm, I didn’t take a golden opportunity to make a guaranteed 50% more for two years.
In 2010, a Chinese investment bank was looking to build out their team in America. I met with the CEO for a four hour interview. He was incredibly respectful and made me feel like I was part of his family. He was also the eldest son of the ex-Premier of China!
I was the perfect candidate for him because I’m bi-lingual in Mandarin and English and had more than a decade of experience under my belt. Even though he gave me so much love and respect, I still couldn’t pull the trigger and leave my firm to relocate back to NYC. I was afraid of change. I felt bad abandoning my firm. And I was worried I wouldn’t live up to their expectations at my new firm despite the two-year guarantee pay package.
In the end, things didn’t end badly since I was able to negotiate a severance, which I wouldn’t have been able to do with the new firm. But still, if I just sucked it up and took the job, knowing that I would call it a career after two years to work on Financial Samurai full-time, I would once again be ~$500,000 richer. My career and not investing in Pacific Northwest real estate is how I left over $1,000,000 on the table.
Entrepreneurship is all about arbitrage! An entrepreneur sees an opportunity where a business is too inefficient or charges too much and exploits the hell out of it. A good example is robo-advisor Betterment, which charges at most a 0.25% fee versus a 1% – 3% fee by traditional advisors like Raymond James, Merrill Lynch, etc.
The two areas that are most ripe to get obliterated are real estate and online payments. I’ve already argued how it’s absurd it still costs 5% or more to sell a home today. It’s also nuts Paypal charges me a 2.8% fee every time I receive a payment. I’ll happily wait a couple of days to receive a $10,000 check in the mail rather than pay $280 in fees. Entrepreneurs out there, please lower the cost in these two important fields.
One of the reasons why I started Financial Samurai in 2009 was because I felt strongly independent publishing would grow to be a major field. Traditional media was getting hollowed out because nobody wanted to just read the news anymore. Instead, they want to read the news written by someone with some subject expertise, get an opinion, and interact with the author. That’s good blogging in a nutshell. The arbitrage was capturing an increasingly disinterested mass media audience who didn’t care for “ivory tower” authors anymore.
There were various opportunities to sell Financial Samurai over the past seven years, but I never seriously entertained them because you don’t sell a growing cash cow in a declining / low interest rate environment. Instead, you hug it tightly before you go to bed every night! Margins in the online media business are massive if operated properly. Once you build a brand you can scale like a champion climber up Mt. Everest. If I sold Financial Samurai, I would be trying to kick my face today.
Everything Gets Commoditized
If you haven’t noticed yet, everything eventually gets commoditized. Therefore, you’ve got to take advantage of the spread before everything becomes the same. Building a brand will help lower the rate of commoditization, but eventually everything conforms to The Borg.
Let’s go back to real estate. A $1.75 million house in San Francisco only costs about $250,000 in Nashville. A 7X price differential is aggressive since folks who live in Nashville can still breathe the same air, watch the same football games on TV, work remotely for Google, create a startup, and still live free as folks do in San Francisco.
Those of us who live in expensive coastal cities have become delusional into believing our cities are so much greater than other cities. We’ve become accustomed to traffic jams, long brunch waits, and $4 gas. It’s like paying $200 for a meal when a $30 meal tastes just as good. To not feel like an idiot, of course we’re going to tell everyone and ourselves it was the best meal we’ve ever had!
To make more money, actively think about arbitrage opportunities. Everybody can immediately do some salary analysis and achieve higher pay. Most probably won’t be successful merger arbitrage investors. But I think many of us can research real estate arbitrage opportunities at zero cost through real estate crowdfunding.
The long term investment trend is to invest in the heartland of America. The way to do so is through Fundrise where they have plenty of eREITs and deals to invest in for non-accredited investors. Technology has made it easier than ever to take advantage of arbitrage opportunities. I’ve personally invested $810,000 in real estate crowdfunding as of 2019.
Stay On Top Of Your Money
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Updated for 2020 and beyond.