Taking Advantage of “Market Inefficiency”

We all collect stocks and bonds in this hobby, so everyone should have a passing understanding of the term market inefficiency. You can find all sorts of definitions on the web and most focus on how well the prices of securities match the true values of companies. For instance, Investopedia.com explains that, “The inefficient market hypothesis and its proponents contend that market forces sometimes drive asset prices above and below their true value. They find support for their arguments from instances of market crashes and upward spikes, whose existence and magnitude are seemingly incompatible with an efficient market point of view.”

To which I say, “No kidding!!” Even a dumb-as-rocks statistician need look no further than the price activity of a single company’s share price throughout the day to understand how little its price movement reflects the workings of that company. Does a company’s productivity really vary by two, five or even ten percent in a single day? And is it really being measured? I think not!

My definition of market inefficiency is dramatically broader. I suggest that every buyer and every seller – in fact, capitalism itself – depends entirely on the purposeful discovery, exploitation and leveraging of every possible inefficiency. Even a grocery shopper with a handful of coupons is taking advantage of a market inefficiency over shoppers lacking coupons.

Right now, utterly amateur sellers can use eBay to rid themselves of unwanted inventory with little more than a charge card and an email address. No matter the items being sold, professional dealers can rarely compete on the basis of price if an amateur purposely ignores the profit motive. By doing that, amateur sellers unknowingly create a radically inefficient market and win practically every sales battle.

However, the professional has a tremendous advantage over the amateur in terms of both depth and breadth of inventory and the ability to replace inventory at will. In fact, smart dealers often use eBay as a source of low-cost goods. No matter the numbers of items an amateur seller might start with, knowledgeable pros can buy until the amateur’s supply runs dry.

At the same time, buyers sporadically interject themselves into battles between sellers and make random purchases at sub-retail prices. However, let’s remember that regardless of eBay’s supposed ability to bring huge numbers of potential buyers to the marketplace, the number of buyers is never sufficient to buy up all items offered for sale. Consequently, eBay must therefore represent an inefficient market situation called oversupply.

This is especially true in the collectibles market.

Regardless of whether we are talking about professional or amateur sellers, expert or beginner collectors, there are tremendous inefficiencies everywhere we look. I contend that every participant in the hobby can exploit some inefficiency if he or she merely takes the time to discover where the inefficiency occurs and works it diligently.

For instance, the collector of limited means can frequently outbuy the rich collector by learning how to structure eBay queries and searching eBay several times per day looking for ‘Buy It Now’ listings. The rich collector can beat practically all other collectors in both live and online auctions and by leveraging connections with professional dealers all around the globe.

Similarly, professional dealers can beat eBay sellers by maintaining their own websites, consistently marketing to large numbers of collectors and offering items never seen on eBay. Sellers with more modest means can outsell professionals by using better photos, more personalized services and deeper one-on-one contacts.

How can collectors and dealers find these inefficiencies? By first realizing that inefficiencies (or inequalities if you prefer that term) exist in every aspect of the buy-sell transaction. Every interaction, every photo, every description, every shipment, every email and every inquiry represents an opportunity for one party or another to magnify an advantage competitors. It doesn’t matter whether one is a buyer or a seller. Just remember that in our hobby, the difference between buyer and seller is fuzzy. Dealers must buy all the time and most buyers (collectors) sooner or later must sell.

In my world, “market inefficiencies” are not the slightest bit theoretical; they are the way the world works.