February 9, 2007

• 700% Return (Lessons on Investing, from WoW)

  Since the World of Warcraft expansion (The Burning Crusade) came out a few weeks ago, I’ve been playing almost non-stop.  A part of it has been getting my main character to level 70, but the more interesting part has been profiteering.  You see, it’s been widely known that the expansion would introduce a new profession called jewelcrafting.  Any new jewelcrafter would require lots of metals and gems to create magic jewelry that confers benefits to the wearer.  Already other professions such as blacksmithing and engineering used metals and gems, so I expected the demand to skyrocket once the expansion came out on 1/16.  To fully take advantage of it, I created 9 characters (also known as “alts” or “mules”) whose sole purpose in life was to carry bags full of metals and gems.  I then went to the Auction House — an in-game Ebay system — and for two months bought all of the metals and gems that were reasonably priced.

  Then expansion day came.  As expected, the demand shot through the roof, as thousands of people started buying materials to play with their new jewelcrafting skills.  I began unloading my goods at vastly inflated prices.  Now, three weeks later, I have about 9000 gold.  My best investment was buying thorium bars, buying stacks for 3g and selling for 24g.  WoW is such a big economy that there are websites devoted to tracking prices, just like regular stock quote sites: www.wowecon.com

  So what does 9000 gold mean?  In the course of the game, the average person will make 1000g going from level 60 to level 70.  The most expensive thing in the game is learning to ride “epic flying mounts” which allow you to fly faster than anything else; it costs 5000g.  In real-world money, there is a black market of buying and selling gold at the exchange rate of about 1$US to 7g.  So 9000g is worth about $1300.

  A 700% return (say over 2 months, equivalent to 4200% APR) vastly beats the 4% you’d get from ING Direct, or the 5-10% you can make with average luck on the stock market.  Are there lessons that carry over to real-world investing?  I can think of three:
  
  1) Big Fish, Little Pond.  Choose an arena where your competition is very weak.  It’s hard to make money in the stockmarket because there are millions of people whose livelihood depends on it, so they take it very seriously.  In contrast, most WoW players are economic idiots.  They will waste money on the most inane things, or sell low and buy high.  Which is fine, because to them it’s a game or hobby.  Similarly, after thousands of interviews the authors of The Millionaire Next Door concluded that it’s easier to get rich in the sewage or funeral business than in becoming a doctor or lawyer, partly because of the strength of competition.

  2) Watch the Tides.  The introduction of jewelcrafting in WoW was an obvious one, but real-life cases are more difficult.  Immigration legislation?  Conflict in the Middle East?  The aging of the Baby Boomers?  All of these can cause immense changes in our economy.  Investment opportunities galore!

  3) Diversify.  The future is impossible to predict perfectly, so it’s best to cover all of your bases.  I had invested in a mix of metals, and thought that iron bars would appreciate more than thorium.  As it turns out, iron prices have hardly moved.  Similarly my investment in blue sapphires did not appreciate the way shadowgems did.  But the winners made up for the losers, and the overall profit was good.  For a great historical and mathematical analysis on diversification as means to mitigate risk, I recommend Against the Gods: The Remarkable Story of Risk.

  • 10:49 am
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