One really cool thing that has happened over the last 2 to 3 years because of Amazon FBA and eBay is the concept of investing in physical assets.
Because of the tanking of the banking system in 2008, the returns on traditional investments are horrendously low. Your typical CD or savings account is going to get you anywhere between .05% to 2% over the year if you are lucky.
Because of the low return, people had to look elsewhere in order to put their money in something that would work for them. That place is physical assets.
Before we get into it…
One other thing that happened during the financial crisis was that a lot of middle-class folks needed to find a way to make money fairly quickly. One of the best and easiest ways to do this was using Amazon FBA to flip some quick cash. The cool thing about Amazon FBA was that it also provided somewhat of a long term means of income generation. You can send in thousands of items and those items, over time, would sell off. Some might take a day, some might take a month or a year, but it provided a way for people to get a return on their investment over time.
The problem though is that much of the Amazon FBA industry and sellers forget about investing concepts and fundamentals that you typically find prior to the financial crisis. The typical mindset of an FBA seller is to get cash back and hand quickly even at the expense of spending a lot of time sourcing and packing and shipping. The idea of putting $5000 into something that gives a 30% to 70% return in 12 months simply does not compute for most people that resell.
People want fast turns and not the slow growth model.
(On a side note, imagine it were 10+ years ago. Most people would be super happy with 4% to 10% return over 12 months. It would simply set money aside, put it to work for them, and then forget about it until they receive their return).
Understand that you aren't losing money when investing
All right, now that that's out of the way, that's get to the fun stuff.
One thing that you need to keep in mind when you are investing in physical assets is that you are not losing money when you do so. This is a concept that 95% of people fail to understand.
If I were to pay you $500 for a box of items that I knew had an inherent value of $1000 I would not be giving away $500 in cash to you. On the contrary I would be exchanging pieces of paper that have a value of $500 for physical assets that have an inherent value of $1000.
What I mean by inherent value is that those physical assets, even if they were to be listed for more than $1000 on Amazon have a minimal or fundamental value of $1000. That means that when I'm assessing risk I can feel confident that even if things were to go sour, I know that I can somehow sell these physical assets for around $1000. This still leaves me profit as well as a cushion of $500 should for some reason the value of the physical assets drop. Even if they were to drop to $500 I would still not be at a loss.
Understand that physical assets are similar to stock but have inherent value
This is the big difference between putting money into stocks, mutual funds, etc., and putting them into physical assets. You have far more control over physical assets that you do with anything else.
Think about it, if you are stock lost 10% of its value what could you do? Well, you could either wait for it to hopefully get its value back, or you can cash out.
With physical products you can your way for the value to increase again, sell them at their current value, switch marketplaces to one where your products hold more value, trade the products for other products, bundle the products with something else to bump up the value, etc.
In addition to the fact that you have more control, most physical assets have an inherent value. Physical assets take money to create. Sometimes the physical asset, just by the materials used to create it, will have a minimum value to it. For example if a physical product has a high amount of copper in it, that copper is going to provide a minimum value based on how much copper is currently being sold on the market.
The point is, things like stocks can tank so hard that they become worth pennies but physical assets rarely lose their value in such a volatile way. Even if they do lose value there are many more opportunities to guard your investment than you have with stocks and mutual funds.
How to invest in physical assets
All right, let's get into the nitty-gritty. When we are talking about investing in physical assets we are not talking about going to your local thrift shop and reselling items on Amazon. What we mean is that you are putting a large amount of money into products that will more than likely give a certain percentage of return over an estimated 12 months.
Typically this is what you need:
- Access to a supplier, liquidator, wholesaler where you can buy in bulk. If you've never done this before, they can be very risky so you want to make sure that you do a ton of due diligence beforehand. Also, don't waste anyone's time… If you don't have the cash to buy in bulk ($3000-$20,000 per buy) all you are going to do issue yourself in the foot if you have a liquidator or supplier find products for you that you don't intend to buy. (Alibaba is probably the easiest place to find a supplier, but hardest to find a good one).
- You, or someone you know, needs to get good at due diligence. As mentioned above, this is super important because although a product may have an inherent value, that does not mean that it's going to sell within a year. You need to be able to assess how long it's going to take to sell, where you can sell it, what are the contingencies if the market causes the product to lose value, where your breakeven point is, and so on…
- If you don't have access to a supplier, or if you don't have the funds to take down larger buys, you can get into a group buy or use something like Brett's Buying Network to get in on larger buys (Brett's buying network recommends a minimum of $1000 per month for buying products. Disclaimer: Brett's buying network is not an investment, it's buying product on consignment where Brett and his team sell them on your behalf).
- You need to have a budget. People who sell on Amazon FBA are horrible at this. Set aside money that is exclusively used in order to buy long-term products in bulk. That money, once used, should be forgotten for 12 months.
- If you do find a supplier, try to work in putting your own private label on products. This way you are pushing out the competition.
- Lastly, you need patience. Remember, buying physical assets is a long-term wealth strategy. If you were to put your money into a mutual fund you don't expect to get a 30% return in a month - why would you expect the same with a physical product?
Here's the reason why putting your money in long-term physical assets is so appealing. Well, it's appealing to those who understand compounding and long-term wealth building…
Say you were going to get into a group by or use something like Brett's Buying Network to put $1000 a month into physical assets. If your goal is to get a minimum of 30% (just an example) back from the money that you put in over 12 months, then over a three-year period you will have, due to compounding, approximately $50,077. In 5 years you'd have approximately $112,230.13.
You get the idea…
(I got these figures from using this calculator at investor.gov)
Get out of the Amazon FBA mindset
If you really want to build long-term wealth you have to get out of the mindset of getting quick returns (one month to three months). I get it, having cash is necessary for your business, but having a diverse mix of fast turning items, long tail items, and large and diversified bulk physical asset buys is the way to build wealth over time.
Have a strategy, create a budget, start putting your money into physical assets.