Greedy Goblin

Thursday, December 10, 2009


People around the world want to invest their money for profit. Obviously you must put some money, or your workforce (time = money) to any project. But it's not the topic now. Under "investment" I mean "I put my money somewhere, do no further work and later I get more back". The most common ways of it are:
  • giving loans for interest
  • buying items to sell them later
  • buying foreign currency
  • buying parts of a company either for profit shares or to sell it later
  • buying insurance papers like CDS-es
Of course there could be nice complicated ways like buying part of a company that buys parts of other companies (investment funds), and even heftier derivatives but the basics are the ones above.

The people tend to believe that such investments can be done without risks, so you can lay back and "your money works for you". I'd like to prove that it's impossible. Such investments are never without risks and these risks tend to be pretty high and can only be decreased by proper risk calculations, that makes the whole thing anything but "laid back". You must constantly look after your money, the "investment" changes into a project, where you always reposition your money to protect both the capital and the profit.

To prove it, I suggest a simple thing: let's try to find a "safe and sure" investment way into WoW. Let's design a method where you shall only give gold to some NPC and you get more back, with the only condition that this NPC can't make gold from air. He must get it from other players or NPCs, in the latter case only in ways that they hand out money now.

There are no foreign currencies in WoW and insurance services are risky by their nature, let's ignore that two points.

Let's start with the most obvious: "buying items to sell later". Many people do it both short and long term and its pretty profitable. The short term version flats out weekly price changes, the long term version usually mean buying before patch and selling after patch. I made lot of gold with such, so did lot of fellow AH-goblins, so it works. The risks are low as the day-of-the-week price changes pretty obvious and can be followed by simple addons. If the sell prices are 50-60% of market in the weekends and 130-150% on Tuesdays - Wednesdays, it doesn't take a genius to buy and sell. Also patch data can be read by everyone. If saronite to titanium transmute will lose CD then saronite prices will go up and titanium down, period (by how much is a question though). However such data analysis and patch evaluation takes time, experience and some brains, so you must work to make them work. The reason why they give so great profit is that only the few players do it.

Let's try to make an NPC for both. NPC No1 collects data and outside patch times he buys when prices are below weekly average and sells them when above. He is always online, camps the AH, buys underpriced stuff immediately and lists new items when only overpriced are on the AH. He needs your gold to do it. If you give him gold, he'll use it to buy more items, keeps track that "this bar of saronite was bought from Jason's money" and when he sells it, he puts that money back to your "account". You can always withdraw gold from your account and also ask him to give you the items he bought from your money. Seems to be sure profit. However imagine that the first people would notice that NPC's high returns and more and more people would give him money. Since he is "fair", if there are 20 "clients" and he spots 20 underpriced saronite bars, he buys one for every client. Since only a limited amount of underpriced goods are available, the more people gives him gold, the more gold will rot on accounts: he simply can't buy items for it as there are no more underpriced items. The profit/gold invested ratio would fall to the bottom.

We can try the investment-over-patches NPC but would get the same result. If the saronites are bought in the expectation that their prices will reach 40G/stack, if only a few people buy the currently 28G/stack saronites, there is huge profit. But if more and more people would give gold to the NPC to invest into saronites, the larger and larger demand will drive the prices closer and closer to 40G. Since the profit is 40G-current_price, it will decrease the profit. If the NPC has infinite gold, he'll buy all saronite below 40-AH cut now, and sell them after the patch for 0 profit.

So, despite the NPC doesn't pay premium to himself from the investor's money and also the investment is risk-free (the saronites will sell for 40G or on Tuesday), the profit paid to one investor decreases steeply as more and more investors come to him. In case of infinite investors, the profit will hit 0.

Let's see loanings. Since NPCs don't need gold, you can only give loans to players. Of course NPCs can handle it for you, you give the NPC gold and he'll loan out to the players. We can even add that the NPCs don't let the players get away with the gold: if he is behind paying schedule they simply substract his current gold from his bag as soon as he approaches any NPC (and he must for repairs at least). We can also link characters on the same account, they share the debth and any must pay for any else. Strike that, link all accounts under the same name, so some multiboxer cannot get loan on one account and give it to the other.

Would it work? Come' on! LeGoLaAs won't be able to repay his money. He'll loan 16K to buy a bike, default on day 1, the vendors would take his coppers, he won't be able to repair, ergo play any fun way. At the first day he might go and farm dailies to repay his today's due, but after farming 2 hours, and facing that he'll have to do the same grind for 6 more months he'll simply won't log in. His character soon will be way too deep to ever recover.

Of course some people would use the gold good and repay his loans. But think of the average player: do you really think they can repay their loans?! The only way to make it work if you select the loan-receivers manually, after long interview process, to make sure he is capable of repaying. There goes your "laid back" moneymaking scheme.

Buying share of a company? Could be done: anyone can start a company. The company would have different bank account from the player, he could only get his daily salary out. The player could spend the company money on buying reagents and raw materials and the income from the sold product would go back to the account of the company. The ways to get the money of company is exactly the same three that used in the real world:
  • slacking: not working just getting salary, the company would rot in absence of income
  • overpaying (bank bonuses anyone?): simply paying too much salary, so it would suck up all profit
  • paying too much for raw materials to friends, who give back some of their income to the company manager
Of course all of them could be countered by constantly overseeing the company. However that would give so much extra worktime, that it would be more profitable to actually be the company manager.

No matter how hard I try I couldn't set up any seriously profitable "my money works for me while I'm on vacation" schemes. Some would give pathetic results, others need lot of work or risky. For the very same reasons I don't believe in real world investments. They worked only in the previous decades because:
  • few people had enough money to invest, so the investment funds were not flooded with money
  • most works were menial, simple, and simply measurable. It is much easier to oversee a hole-digger than digging a hole. But overseeing an engineer or software programmer needs the same education and nearly the same time as the work itself.
  • the people were ethical, believed in lot of naive things, so most of them didn't steal even if they could. Good luck finding a guy who leaves money on the table and smart enough to create the money on the first place


Sepi said...

I disagree.
You are right about one thing though.
There are no free lunches.
Investing is always "Risky", but you can make your money to do MOST of the work, some personal effort is always reguired. For example, hire a person to do your investing or buy an apartment and rent it. These are few ways to use your money so that others are doing most of the work (person who rents the apartment eventually pays it back to you, and probably maintains it. As it is his/hers home).
Investing is better than a "secure"
job and salary. As there isn't really such thing as secure job. You can get fired any day, and then you are without income. If you are an investor, there is no "Boss" who can fire you.
Thats secure.

Anonymous said...

until your renter loses his job, defaults on his rent causing you to defalut on your mortgage and thus you get "Fired" by the bank, though i would take the rent scenerio any day but it is work and risk.

Gevlon said...

Or the home prices drop and you lose more than the renter pays you in ten years (opportunity cost of state bond interest included).

Anonymous said...

Thanks for stating the obvious Gevlon... There is no such thing as a work-free/risk-free investment.

That aside, there are people in this world who make money without lifting a finger, but they do so as a result of others having done the work/taken the risk before them. I am referring to people with an inheritance, be that owning property or share in a company...

For the rest of us, there will always be work and/or risk involved.

As WoW players with a market analysis tool, anyone can make money by simply "buying low, selling high". I only wish we had an auctioneer for the real world.

Everblue said...

Ah but Gevlon this is because you are an engineer! You want everything to be measurable. In economics there is such a thing as the "risk free rate", this is historically the prevailing rate on local gilts, although in practice of course (cf Argentina) there is a tiny risk of default.

Ultimately all investments have risk, and investing is simply (!) a matter of choosing those investments where the predicted return is in excess of the perceived risk. If you wish to be a laid back investor you can pay someone else to measure the perceived risk and the predicted reward for you, and give them a slice of the profits.

Enjoyed the post though.

Anonymous said...

I totally agree with your post gevlon.

One thing about investing is a way to make money, that would otherwise just sit around and collect dust.

Profit and risk are always connected in some way or another.

For instance :
1. Trading currencies is such a risky platform to trade on, but has massive profits when you succeed.

2. Investing your money in the bank to earn interest(or using the money market fund), has very low risk but the profit is a mere 8-12% per year which barely covers inflation.

Whichever way you look at it, investing is a great way to make your money grow, even if it is just breaking even with inflation(money's value staying same instead of losing 8-12% per year) or making 300% per year doing currencies.

Great post alltogether, good read.

Sepi said...

To Anonymous;

Do your country have 8-12% inflation in currency every year!? I think not.
By the way, you dont agree with Gevlon, as he doesnt believe real world investments and you clearly do.

Gevlon said...

@Sepi: I don't believe in "safe and work-free" investments. You can make money from more by taking risks or by doing lot of analyst work.

Dan said...

Loans would work in WoW, if the amount of gold earned were slightly higher than that earned in WoW classic. Sure they could work now but not nearly as well.
The thing I noticed which were clearly omitted in terms of loans was a theory called credit. This could work by allowing all first-time borrowers to borrow a small amount of gold, say 500. The term of the loan could be 1 week with 25% interest compounded daily - two payments of 251g 80s. As borrowers prove they pay their loans on time, or even early, they may eventually borrow larger sums of money with more flexible (and favorable for the borrower) terms, such as 25,000 gold over two months (9 payments) with 12% interest, minimum payment 2809g 93s/week. Yes my math may be off, it's been a while since I've used Algebra.
I do agree with multiple account players being linked for any loans made. This should greatly reduce the risk of a default.

Chelm said...

Not that I'm willing to do them (anymore), but aren't daily quests an inherently risk-minimized investment?

Sepi said...

No, dailys are not "risk-minimized investment". Dailys are just tasks you perform for money...job.
Maybe you can think that you invest time, and the profit is money. But then again, thats just semantics.

Sepi said...


Ok, i misundersood you then.
I thought you dont believe in RL investments in general, because there is no "risk-free, no work scheme" for you to exploit.
I guess there would be lot more "investors" if that "scheme" would be easy to figure...resulting that not being profitable anymore....etc.
SO if someone figures it out, dont put that on blog :)

Genaro said...

Your analogy comparing the real life (RL)world of investing with that of WOW is flawed.

Your WOW examples mainly deal with arbitrage related to market inefficiency (due to your "M&S" effect).

RL investing is not normally an abitrage as most stock markets are reasonably effient. Rather, an investment hopefully works because it is invested into something that creates real value e.g. a company that provides a product or service that people find useful.

Overall, investing in the stock market is investing in the future of our society (assuming you live in a capitalist society). If society is productive then your investment should be successful.

When you state that you do not believe in such investments you are disregarding the last century of history which tells us, even allowing for recent falls, the stock market provided significant long term investment returns.

Your advice on making money in WOW can be very helpful and entertaining. However, people who are investing for their RL long term futures should not take your musings too seriously. If they do they risk having an impoverished old age and turning into a "grumpy goblin"...

Orcstar said...

I think this is what caused the crisis.

Investments went up, way above their real value because there was too much money in the market, not because they were worth that much.

CSDX said...

There are always some risks, buthonestly there are pretty sure bets that you can make with investments. Take for example the US Treasury bill, it'll pay out at a rate the government sets, and there is practically 0 risk of them defaulting. After all, it's the treasury, they can always just print more money. Furthermore if the government did collapse and no one was around to honor those bills, no one would be around to honor those useless scraps of paper and bits of metal as well.

Also take a look at money market funds, they don't have the best return but only one has ever so slightly and briefly dipped into negative returns in this economic crisis.

So yes, nothing is risk free, but even just holding onto your money (whether as currency or precious metals or real estate) and not investing it at all also has it's risks. You might as well just say life isn't risk free, after all an anvil could fall on your head from the sky without warning.

Baktru said...

Treasury bills are not a risk-free investment.

Countries CAN go bankrupt.
Their currency can become virtually worthless making the bonds virtually worthless.

Now some countries are lower risk and it makes more sense to invest in their bonds, but those will also yield the lowest returns...

Anonymous said...

@ Genaro
As Gevlon has already said in another reply to a previous comment, he doesn't believe in risk free, no effort investments.
And I don't think the point of the post was to make analogies with real life investments, but rather to show that even in a game like WoW, there is no such thing as a risk free investment with no effort involved.

The Gnome of Zurich said...

T-Bills, if they are not very short term, carry inflation risk. A long term T-Bill earning 4.5% will lose money if inflation goes up to 5% and stays there for much of the term.

The only effectively risk free investment available to most people are the CPI indexed T-Bills, or TIPs. But these earn a paltry 1-2% most of the time, and many people believe that the CPI slightly understates inflation. So these vehicles do little more than protect your money.

In economic theory, the risk free rate should be equal to the economy's total productivity growth rate plus the market rate of pure time preference, which normally works out to around 2-3%/year. In practice, it's impossible to generate this rate in a risk free investment due to fees and spreads, and you can't normally even get close without complicated hedging mechanisms that can expose you to tremendous risk if you don't know what you are doing with options and swaps -- so expertise required.

For investments requiring near zero time, near zero expertise and exposing you to near zero risk, gevlon is pretty close to correct, the best you can hope for is to barely beat inflation. 1-2%. Which is admittedly not to be sneezed at. 1-2% is a whole better than 0%. But most people will want to take on some risk and learn some expertise in order to do better on average.

Nick S. said...

This is one of your more confusing posts, Gev... but I think I agree... no such thing as a risk-free investment.

Any investor I know could tell you that, though - they speak of "low-risk" and "high-risk" investments, but never "no-risk."

Kronojuice said...

You're assuming information symmetry though. You can make risk free high return investments if you know something other people don’t know. It’s illegal to do this in the stock market, but you can do it in WoW, or real estate, or business, or any number of other investment opportunities.

bobturkey said...

I was so with you on this post. No investments are risk free, yada, yada. Then you added this complete tripe to the end of the post:

"For the very same reasons I don't believe in real world investments. They worked only in the previous decades because:
* few people had enough money to invest, so the investment funds were not flooded with money
* most works were menial, simple, and simply measurable. It is much easier to oversee a hole-digger than digging a hole. But overseeing an engineer or software programmer needs the same education and nearly the same time as the work itself.
* the people were ethical, believed in lot of naive things, so most of them didn't steal even if they could. Good luck finding a guy who leaves money on the table and smart enough to create the money on the first place"

Having more money in the system doesn't automatically break it or prevent it from working.

Yes modern projects are generally more complex but there is no direct correlation between labour complexity and the ability for investing to work.

People were more ethical?!? This is not even remotely true. Perhaps unethical behaviour wasn't communicated to the masses as swiftly or at all, but that doen't mean people weren't unethical. It means you were less likely to know about someone being unethical on the otherside of the world.

Gobble gobble.

Azzur said...

LOL at this post. I totally agreed that there is no "risk-free" investments and thought you were about to speak out against people who thought so. Even investment in bonds is not 100% risk-free as countries can go under financially.

But then you made a totally irrelevant comparison with WoW and added this line:
"For the very same reasons I don't believe in real world investments"

This is totally wrong and ignores evidence that investing does produce results. The best way to minimise risk would be to have many eggs in many baskets.

Vyr said...

I think investing doesn't fall under the 'easy and risk free' category but I think it falls under the 'lets my idle money increase exponentially or... compounded with little time spent'

Investing definately carries risk but no matter how much you try to evaluate it, maybe being a day trader requires you to stare at the screen during market hours. But for a more regular investor maybe checking prices at least once a day? It allows working adults who still require their salary to survive an avenue to increase their financial wealth outside of their normal working hours. So I guess that's where the, 'let your money work for you' comes in. However, it has relatively good 'gold per hour' even though it comes with risks.

Gevlon: "Or the home prices drop and you lose more than the renter pays you in ten years (opportunity cost of state bond interest included)."

There are certain places or should I say countries in which the home prices only go 1 way. That is up. At least for the near future in like, 5 yrs.

Nagbag said...

"To Anonymous;

Do your country have 8-12% inflation in currency every year!? I think not."

My country had more than 13% last year. In comparison, most advertised banks here offer 16%+/year interest for small deposits.

Patrick said...

Basically all this brings us back to economies of scale. Investments however in wow would make players more dynamically efficient if we may call it so.

MyName said...

I think the problem people have with his real life investing comment is that he was talking more about like managed funds while you all were talking about index investing.

The reality is that you can't beat the market over the long term. It's more efficient than you are. There are people who have a full time job researching and making investments and they still sometimes lose. The solution to that for the average investor is to just diversify and free load off the full time investors. But most people don't want to do that, and most fund managers don't want people to do that either.

Anne said...

Gevlon, you are extremely illogical in your arguments. The basic differences, financially, between WOW and real life is the existence of governments in real-world, which has no counter-part in wow and the fact that in wow, money is infinite, literally.

Some things governments do, which don't happen in wow: taxes, confiscate your money when shit happens (happened in my country, where all my family's houses+businesses were confiscated by communists 50 years ago), offer guarantees (and sometimes withdraw them after shit happens), force you to give away your gold, practically mugging you (happened in US, during the 1929 crisis). The government protects the "slackers", among them being children and old people, who already paid their taxes. So even the slackers are not the same as in wow.

About "infininte money": while irl, money exists in a finite amount and printing more can have effects on their value, in wow money exists in infinite amount, and "creating more", whatever that might mean, is pointless, which shows, among other things, that inflation happens even in the absence of money-printing. Interesting question: could deflation take place in WOW? But in short, money does not have the same value in both worlds. The real currency in WOW is not money, it's time spent.

Also, in wow you do not have anything that you cannot live without, so you can afford to invest and lose. In life, you can't live without at least bread.

I can continue, but these are the most important differences.

As such, your arguments are worthless, as the models do not match.

Anne said...

btw just in case, to anticipate a possible answer: Blizz is not an equivalent to a governmenet (no taxes, they are not a competitor on the gold market, they don't print money when shit hits the fan, they don't bailout anyone etc.)

ofc you can say that blizz makes easier dungeons for slackers, but this would be shifting the discussion, as we are talking about the financial dimension of wow. Blizz does not collect gold, even if they collect money.