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Whenever someone tries to explain what arbitrage is they invariably come out with an analogy of buying a car for some amount of money and selling it for more money. If they’re being particularly chatty they may even extend the example to a time where you already have a buyer lined up and who may even have paid you before you buy the car. But does that ever happen in real life? Well in November 2011 we decided to give it a go.
First off we need a buyer and seller who place a different value on the same car. A simple example could be a car dealership who buys all their cars from an auction house, they then clean the car up and wait for a customer to come along who they can convince to buy the car at a substantial markup.
Another example would be a company like ‘webuyanycar.com’. They buy your car off you for a price they know they can sell it straight on and make a profit.
Both of these businesses are in very competitive crowded markets, where a lot of other people are doing the same and on top of that they also require a lot of money up front for purchasing and repairing the vehicles, for space to store them, and for the hours needed to man and sell/buy the cars. Last thing we want to do is to plow all the profit from our hard earned into a business venture in a market we know nothing about! Is there a way to do it with smaller upfront investment and with hardly any risk?
Once upon a time people could buy cars in an auction in Scotland, drive them down to London and sell them for a profit in the auctions there. That sounds like a good idea, your total costs are the one car you have purchased, the cost to get down to London and the auction fees. Also, you only hold onto the car for a short amount of time reducing the risk of anything happening to it. Unfortunately as with a lot of these arbitrage opportunities the more people who do it. The smaller the margins get until they’re just not worth it anymore. Currently, the price difference between the Scotland and London car markets isn’t big enough to cover those intermediate costs. Are the margins big enough if we look further afield?
What about, say, Malta?
They drive on the left-hand side of the road, just like the UK, so the cars are identical.
Used cars sell for a lot more than in the UK.
