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The Secret to Making Unusually High Profits

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An Efficient Market is one in which prices reflect up to the moment information.

Let me give you an example. I'm sure you've gone to a big sports event or to a concert and seen scalpers selling tickets outside the arena.

If you needed to buy a ticket, what you'd find is that different scalpers would be offering tickets at just about the same prices. How does this happen? Well, the buyers do comparison shopping and buy from the scalper who offers tickets at the lowest price or best perceived value for the location of the seats.

The higher-priced scalpers are forced to lower their prices so they don't end up with a supply of useless tickets once the event starts.

Some buyers will get really good deals because the scalper they deal with will be very motivated to sell. Maybe the guy's got a bus to catch in five minutes and is really anxious to unload his tickets.

Some buyers will pay higher than average prices because they're a huge fan of the performer, they really want to see the show, and won't make the effort to shop multiple scalpers.

The price that is paid strikes a balance between the urgency of the scalper to sell the tickets and how badly the buyer wants to attend the event.

No seller makes above average profits consistently nor does a buyer pay below average prices consistently. This basic concept works in every market to push prices together after a period of time.

So an Efficient Market in any industry usually eliminates the ability to make unusually high profits. Organizations as well as individuals are always doing battle against efficient markets in every way possible to make money.

If there's a good opportunity for higher than average profits, players in the market are going to try to get that profit.

Until a sufficient number of companies learn about new, lucrative opportunities, some companies will do extremely well. As the high profits induce more and more new companies or people to enter the market, the quality of the opportunity diminishes.

Taking advantage of times when markets are unusually profitable and off-balance is very challenging. To capitalize on above average profits requires incredible organizational flexibility, creativity, and speed. This is the reward for entrepreneurship.

It's been said that the best strategies are irrelevant if they take too long. You snooze, you loose. Jack Welch, the famous ex-CEO of General Electric described the markets in which he competed as "brutally Darwinian".

Economists have observed the Efficient Markets idea for a long time in the stock market, where the principle is also known as the Random Walk Theory. The principle is very obvious in the financial markets because analysis of companies does not always allow an investor to make a killing. If it did, everyone would be very wealthy from investing in the stock market.

We know that some people have done extremely well in the stock market, but we all know people who have suffered tremendous financial losses too. But over time and on average, the winners balance out the losers.

In some cases, investors may outperform the market because they have inside information about a company that few other people know. Insiders can sometimes buy stocks for less than they're really worth or insiders can sometimes sell stocks for more than they are really worth. But for the average investor, beating the market is difficult.

There's a classic joke that economists tell: "an economist and his young assistant are walking down the street. The assistant bends down and reaches out, trying to pick up something from the road. What are you doing?, asks the economist. There's a $20 bill on the ground, replies the assistant. Nonsense, replies the economist. If there were really a $20 bill on the ground, someone else would have already picked it up."

This is why Economics has been called the dismal science. If it seems too good to be true, it probably is. The $20 bill won't stay on the ground for long, but those who are fast will find it.


About the Author

Laura Adams is the host of the popular MBA Working Girl Podcast. The content combines brainy business school theory with real-world business practice from her career as a business owner, manager, consultant and trainer. Subscribe for FREE to this top-rated show and get the useful MBA Essential Tip at http://www.mbaworkinggirl.com


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Article Published/Sorted/Amended on Scopulus 2008-01-03 11:52:43 in Business Articles

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