https://www.youtube.com/watch?v=y4VoOKa1ywQ

1 00:00:00.000 --\> 00:01:00.000 how much money you make and the extent
to which you you you crush it will be dictated by how big the arbitrage
what's going on everyone i'm gonna be talking to you about my fa one of
my favorite topics um arbitrage and so the first time i heard this word
uh was actually in a fancy dinner i was sitting at and i was like i
don't know what's going on and these dudes in finance were talking about
derivatives and crazy stuff right they just kept saying arbitrage and i
was like what is it you know like like finally i was like what does that
mean um and they were like oh it's like when you just take advantage of
an inefficiency in a marketplace and i was like how and so then they
explained it to me and they're like well it's sort of like when you go
on ebay right and you can buy something for five dollars and then you
can take the same thing and then just go into amazon and sell it for

2 00:01:00.000 --\> 00:02:00.000 fifty dollars well that would be a big
example but you get the idea where you buy for five and you sell for 50
and it's because there's an inefficiency in a marketplace where there's
that's where the arbitrage happens right and so the definition of
arbitrage is where you buy in one market right at one cost and then you
sell in another market at another cost so you sell high and you buy low
pretty simple right everyone understands that that makes shakes that
should make sense and here's you in the middle making all your money
being happy yeah there's you all right so that is basically what
arbitrage means but the more i thought about this concept the more i
realized that all businesses arbitrage and how much money you make and
the extent to which you you you crush it will be dictated by how big the
arbitrage is right even if you think about basic business a service
business you're buying labor in the labor market this is market one this
is why this is important is that you're buying and

3 00:02:00.000 --\> 00:03:00.000 selling between different markets all
right this was a point of nuance that i didn't understand when they
first told me how this worked and i also didn't want to ask because i
was embarrassed that i didn't know what i mean so hopefully you can
watch this and not be embarrassed if someone says it all right so market
one and market two so there's an inefficiency this little line here is
the inefficiency between the marketplace what you're buying it when
you're selling it right right and so market one can be a labor market
you're buying labor at x price and you know that you can sell the labor
at another price to market too right and then that's how you make a
profit but every business fundamentally works this way i can buy from a
manufacturer for a dollar and sell it over to market or market number
two for five dollars right now and even the manufacturer buys from raw
ingredient producers who buy it from farmers at one dollar and sell it
for five dollars right and so that's the game that continue gets played
between market one and market two and a a supply chain is literally a
series of markets in a row of markets buying and selling

4 00:03:00.000 --\> 00:04:00.000 buying and selling and buying and
selling and then the person in the middle the business owner is
technically arbitraging all of these things right right okay now here's
where i think this is interesting there are two so take this concept
pocket it in your mind for a second and so one of the concepts that i've
tried to explain um and i'm i'm partially making this video so that i
can i know that i learn things better when i teach them all right so
it's the difference between economic profits and accounting profits if
anyone took economics if you did right then they would talk about this
and the difference i'll start with accounting profits because it's it's
the easier one to understand they're not hard to understand but it's the
easier one all right so economic profits versus accounting accounting
profits are revenues minus all costs right that is an accounting profit
right that's what most of us do when we do our tax returns that is an
accounting profit simple everyone should understand that an economic
profit is where you take the revenue minus the explicit cost of doing

5 00:04:00.000 --\> 00:05:00.000 business and then you also subtract out
the opportunity cost which is the implicit cost of using the resources
that you have in that particular market or path versus another
opportunity so let me give you an example so let's say uh you owned a
paper mill right and your company owned a forest and that's where they
cut the trees down and then they turned it into paper right simple now
the economic profits of that business the opportunity cost that would be
factored into that economic profit is whether or not you could make more
money just selling timber right or selling sawdust or selling wood those
would be different examples of things that you could do with the
existing resources you have which is this guy in the middle here he's
got resources he's got people he's got maybe equipment skill sets talent
etc that if he were to apply those skills to a different market he could
then make more money and that is the difference between

6 00:05:00.000 --\> 00:06:00.000 economic profits and accounting profits
and the reason this is important to me as an entrepreneur is that when
i'm looking at what i want to get into right with what things are
interesting to me or for investing because i invest in businesses now
which is kind of wild to me um but anyways is that i'm looking is this
given these resources of humans and skills and and equipment and
software and everything we're currently pursuing arbitrage opportunity a
right but what if with these same skills i could have arbitrage
opportunity b where i'm buying in this market for rock bottom prices and
there's another market over here that is paying top dollar right so
between the first example i have where it's a it's a normal amount of
money that's being made compared to this arbitrage opportunity i would
want to be in this one right now what's going to dictate whether or not
it's going to be one of these markets versus one of these markets

7 00:06:00.000 --\> 00:07:00.000 well the growth of the marketplace
overall there are growing markets like online fitness is a growing
market right and so it means that there's likely going to be arbitrage a
greater degree of arbitrage because there's going to be more demand and
so if i can find markets where i feel like there's more demand for the
same things that i can buy cheaply then i want to go to those things and
so when i'm thinking about all opportunities because i think that that's
one of the biggest superpowers that we have to have as entrepreneurs is
not sure like right now i could go and run a gym and make money i could
i could also run a massage parlor and make money i could also run a
supplement company make money i do that too right i could run a lot of
different businesses to make money but of all the opportunities under
the sun of all the different ways i could make money which is the best
given my resources skills talent team etc and then if i look at all of
those things on a board these are the things that we're absolutely
amazing at and these are the different arbitrage opportunities that
exist

8 00:07:00.000 --\> 00:08:00.000 which of these arbitrage opportunities
will be best fit for the skills talents traits team etc that i have and
then by answering that question we'll inherently answer the very
important question which is what can we be the best in the world at and
so i think for me this has been a really valuable concept to understand
is that all businesses arbitrage it all functions off of an information
advantage between the buyer and the seller the bot sorry the seller
always has the information advantage or many times has the information
advantage and so fundamentally when you find out that an iphone costs 17
to make people are shocked by this but that's because there's obviously
other costs besides the manufacturing obviously but all big businesses
run off of extraordinary degrees of arbitrage right facebook is able to
have eyeballs and sell eyeballs at a significant amount cheaper than it
costs them to manufacture them right right uh verizon it costs them
pennies to add another user to their base

9 00:08:00.000 --\> 00:09:00.000 and so the reason this is important for
me to at least express is that for a very long time when i was when i
was earlier on in my career i had these weird morals and ethics around
how much more i could charge for something the reality is there is no
limit it is simply based on the market demand and so whether it costs
you a penny to make something that's worth a thousand dollars or cost
you a penny to make something worth two pennies that price that you
charge should never be in any way relation to what it costs you and only
related to what the market will allow and then it's up to us as
entrepreneurs to look at which arbitrage opportunities exist between
marketplaces that best fit our skill sets and by doing that we will then
find ourselves in the best opportunity vehicle for us to grow in the
long term and probably make the most money so anyways i hope that was
valuable for you i hope this made sense for me this is a topic that i
love talking about um and i hope that you find value in that and
otherwise have an amazing day i'm rooting for you keeping awesome leave
a like comment or review already your subscription or subscribe or tap
the button or all the stuff um keeping awesome

10 00:09:00.000 --\> 00:10:00.000 catch you soon bye \[Music\] \[Music\]
\[Applause\] you
