How to Turn $1 into $1 Million: Part 1?—?Turning $1 into $2 in Twelve Different Ways

(note: I previously posted this on Medium)

So I was reading a Quora article the other day which posed the question on how to turn $1 into $100 or more. The accepted response just didn’t sit well with me. The supposed “right” answer was:

Forget the dollar. It is a red herring. Just find a way to earn $100.

This same Quora article quotes the example of some Stanford students following this “forget the money” example and selling reservation spots they held at restaurants. Another “forget the money” example was selling a sponsorship ‘shout out’ at the Stanford business school during their assigned presentation time. While these are indeed clever, they don’t actually answer the question in a way that examines the differences between just how to double cash on hand.

For the Quora audience, being clever and not really following the rules is the way to win. But is this really a helpful answer? What if you really want to double your money? Is the proposed solution really something that will work for others or was this a special one-time case? Does this scale? Does it not factor in time cost? Or dependence on access to markets? For this “right” example, were the students thinking they were selling one thing (access to reserved spots) but really selling something else (support of the Stanford MBA program)? Did this solution have an over-dependence on luck? Did they have some unfair access to supplies (restaurants) or to the market (people who wanted reservations) that they could leverage to their advantage? Did they ignore opportunity or time cost?

So I decided to start from square one and pose the question to my motley LinkedIn followers by asking the following question:

You have $1. That’s it. $1 in cash. How would you turn it into $2 in cash? Rules: You can’t spend more than $1 (or buy services that cost more than $1 and pay for it later), or borrow money from anywhere. You’re not allowed to use services or products that cost nothing now but will cost something later after you made your $2. And you can’t just ignore the $1 and sell your time instead. Because then you’re not turning $1 into anything. It’s a simple challenge looking for a simple solution.

I found that the responses I got lumped into a few general strategies:

• Strategy #1a: Buy a product or service for 1x and sell it for 2x (aka “Buy Low / Sell High”)
• Strategy #1b: Make something that costs 1x to make and sell that something for 2x your cost (aka “Make Low / Sell High”)
• Strategy #2: Buy Something then Lease It Out
• Strategy #3: Invest / Grow / Lend / Put your Money to “Work”
• Strategy #4: Gamble / Speculate
• Strategy #5: Provide Entertainment
• Strategy #6: Raffles, sweepstakes, contests
• Strategy #7: Sell your time, and use the money to make your time more valuable
• Strategy #8: Sell your insight or expertise, and use the money to promote your insight or expertise
• Strategy #9: Sell Access to Something, Someone, or an Experience
• Strategy #10: Sell Advertising, Sponsorship, or other forms of “Visibility” and Promotion
• Strategy #11: Be a Market Maker / Intermediary

In this series I’ll explore each of those strategies and ask some fundamental questions about whether it works to grow $1 to $2 and in general grow 1x of cash into 2x. In this part one, I’ll explore just one of the strategies. Look for future installments to learn about the many other strategies for accomplishing the same goal.

Strategy #1a: Buy a product or service for 1x and sell it for 2x

Everyone remembers the experience of selling candy bars for a school or non-profit function. Or perhaps you did this on the down-low at the back of the school bus or near your locker, getting some cheap candy or supplies from the wholesale discount store and then selling them at school for a nice, hearty markup. This basic idea of buying something where the supply cost is low (or easily available) and selling it where the demand is high or market is constrained is how many school kids are introduced to the basics of capitalism and free market systems. But more importantly, this fundamental idea of buying something for a low price and selling it for a higher price is how almost every retail business works.

So it’s no surprise that when asked the above question of turning $1 into $2, most responses apply what we learned as elementary school children. After all, this strategy seems to work, right? Here were some good examples from the responses I got:

I would find a market with a surplus of “something(s)” that you can procure for <$1 and sell said “something(s)” in a market with a demand that will allow for profit margins required to gain $1+ from sales after cost of goods.

An iteration on that…

Buy 10 ‘somethings’ for 10 cents each and resell with a 100% mark up, each for 20 cents. That would give you $2. Not net $2, but that wasn’t the question. As long as your cost of sales isn’t more than $1 you would have some profit and if you pick the right product and market you could always reinvest the $2 and double again and possibly increase profit by lowering cost of goods due to larger purchasing power.

Here’s a more specific example with specific products and a specific “captive audience” market:

Purchase 35 cents pack of gum. Go to a popular nightclub or lounge and sell it for 75 cents to a guy/gal looking to freshen their breath. Take the profit and purchase another pack of 35 cents pack of gum and repeat the process. After I have enough cash I would invest in more high demand travel size, hygienic items (deodorant, mouthwash, etc. ), and start to sell those at the nightclubs and lounges.

So yes, absolutely, you can apply what you learned as a kid to this situation. But here’s where things get complicated. At what point does this strategy stop working well? It is relatively easy to turn $1 worth of candy into $2 in cash because the numbers are small. And perhaps you can just as easily turn $1,000 worth of candy into $2,000 in cash, factoring all your costs. But what about $10,000 worth of candy? Or $100,000 worth of candy? Can you easily double $250,000 worth of candy to $500,000 in cash? At some point, this buy/low sell high retail approach stops scaling. Why?

Are you neglecting to consider the cost of sales?

In the above responses (and many others), most of the responses were of this buy low / sell high variety. But many of them neglected to consider the cost of sales.

In particular, here are some things to consider:

• How can you buy those “somethings” efficiently? Are there minimum order quantities which defeat your low-entry cost efforts or force you to buy more than you can effectively (and profitably) sell?
• How would you sell efficiently without incurring lots of labor cost?
• Are you factoring the cost of getting access to your market? (getting into the nightclub)
• Are you factoring in transaction costs for selling the items? Or the cost of using a sales platform?
• Are you factoring any applicable taxes?

If you have to pay to get into the nightclub to sell your gum, then your cost isn’t really just the cost of your product. Likewise if you have to pay to market your product, pay for a distribution or sales platform, or pay for people to help get the product to your customer, then you have costs that are much higher than what you might think. Not factoring the total cost of sales, customer acquisition, fulfillment, and other Cost of Goods Sold is a typical reason why expected profits for retail businesses fail to materialize.

Paying for Services instead of Products

What if we’re talking about using our $1 to buy a third-party service which you in turn resell for $2? For example, what if I could pay someone $1 to post something to their Twitter profile, and then turn around and sell that post to someone else for $2? It would be a high-margin, low supply cost, low labor cost, low time to return $1 investment turned around for a quick $2 gain. In fact, that’s probably what I would do first before I even picked up a box of candies.

As you can see there really isn’t much difference between services and products when it comes to a buy low / sell high strategy. What you need is either access to a low cost service/product or some access to a market with high demand. On that subject…

Another Version of Buy Low / Sell High: Speculation

What if the thing you are buying doesn’t have a well-determined fixed price, such as a stock, or equity in a startup, or even a house? Clearly there are millions (billions?) to be made by buying some really undervalued asset and selling it later for a lot more. That’s how people make money flipping houses, angel investing, private equity or hedge fund investing, or even buying collector artwork, coins, and more. All of this is just more examples of buying low and selling high to double that $1 into $2. And then numerous people saying this:

Buy ETH :)

Buy some crypto.

Duh. Buy $BTC

But we have some unique challenges here. In the case where you’re buying an asset of unknown future value, you have no control over the future demand price. You can’t say that the $1 you buy today will be worth $2, $5, $100, $1,000 or... $0.10 or $0 tomorrow or in the future. Some assets have limited upside, such as buying houses, but they also might have limited downside (houses again). Some assets have almost unlimited upside (angel investing) but they could turn to zero value just as easily. Some assets have very constrained buyers markets (collector artwork), so you have to really have good timing and knowledge of the market to make any money here.

We call this sort of highly variable buy low / sell high strategy speculation. The only thing you really have control over for speculative assets is the price at which you buy that asset. Smart speculators know to push their buy price as low as possible and gain as much future leverage for that investment as possible because the likelihood of it returning a possibly substantial loss is very high. I’ll address speculation approaches to doubling money in greater detail in its own post.

One thing to note is that some people who are speculating on future value of an asset might think it’s a sure thing, when it’s anything but. Right now, putting money into cryptocurrencies such as Bitcoin or Ethereum seems like a definite way to make lots of money. Let’s see if that’s the case. Clearly hindsight now shows that it would have been extremely smart. Putting $1 into Bitcoin in 2009 would have been an amazingly smart thing to do. Then again, buying real estate in 2005 or tech stocks in 1998 or gold in 2009 also seemed particularly smart.

Access to Markets

Even if you can get your cost of sales down to near zero, for example, by using your own time instead of paying someone else, selling in person instead of online to avoid online costs, using cash instead of credit cards to avoid transaction fees, and avoiding paying sales tax (ahem), you still have the primary issue of access to the ready market of people willing to buy your marked-up product.

In the case of the selling candy bars at school issue, you have the advantage of being a student at that school. But what if you are just some random adult? Good luck selling candy bars to kids at school, you creep. In the general example, if you have the ability to source low-cost supplies, you need to have some ready access to markets that are willing to pay a premium. I address this issue below. If you don’t have access to such a market and you’re competing against everyone else selling the same thing to the same market… good luck. Your attempts to buy low / sell high will be met with the strong face slap of competition.

If you’re selling gum at the nightclub, can you get in for free? Are you hustling against everyone else hustling? Will you be bounced out of the club and shut out from your market, being stuck with lots of unsold inventory? Think about this specific to your case. Are you buying inventory cheap in order to sell it to another market, without guarantees of exclusive access and guarantees of demand? Be prepared to sink your money into unsold inventory. Your $1 investment is now worth $0 or less.

Are you Factoring in Labor cost?

Another thing that Buy Low / Sell High’ers tend to overlook is the cost of their time, or other’s time. In the example of selling a $1 product for $2, the time is minimal and so the time cost is minimal. But as things scale, or if your market access is more difficult than anticipated, you could be spending quite a bit of time turning that $1 investment into $2.

What seems better: spending a few days selling $1 worth of product in order to make $2 profit, or getting that same return in just a day. Strategies that have constant, low time cost with the same return will yield a better Return on Time investment than other approaches that require a lot of time and labor. If you’re basing your business on a buy low / sell high approach, make absolutely certain you have low labor costs. This might mean buying access to markets to simplify and accelerate sales, getting some unfair competitive advantage in costs, simplifying your order-to-delivery process, and other means to make sure you’re not spending all your time hustling for meager returns and burning time getting product to your customers.

What about Time to Return on Investment?

What if you can be really efficient with labor because you can simply wait until the right customer comes around? In this case you buy your product super cheap when the market provides an opportunity, and then you simply wait until the market provides an opportunity to sell at your preferred price premium. In this case, you don’t have to worry about labor costs, market access issues, or cost of sales. What do you have to worry about is your Time to Return.

What if it takes a year to get the double you’re looking for? Two years? A decade? Is it worth buying that item for cheap and waiting an indefinite amount of time to get the return you’re looking for? Not only does your return on investment get worse over time in this scenario, but you also have opportunity cost. The money you sank into that $1 investment could have gone somewhere else.

Making Buy Low / Sell High work: Access to low cost supply

If you’re set on doubling your $1 by buying and selling something, then one sure way of reducing your risk is to find some super-low cost for your supplies. In the case of $1, go to the dollar store and get a case of the cheapest candy they have. In the larger scale cases, find some sort of “unfair” competitive advantage where you have access to such low cost of supplies that you can out-compete everyone, even when there’s competitive pricing pressure. This is the fundamental basis behind the Walmart business model. But it’s also the basis behind all those hucksters selling legit Coach bags that “fell off” the truck. Unfair supply side pricing.

If you plan to “win” by getting your supplies cheap, don’t forget issues around minimum order quantity, which can screw up your plans by forcing you to sell a lot more than you are readily able to. The enemy of cheap supply costs are excess inventory. Overstock discounting is the bane of retail existence. The most profitable retailers are masters of just-in-time inventory, supply-side negotiation, and supply chain logistics.

Making Buy Low / Sell High work: Access to high-demand markets

You know why a bottle of water that would cost pennies at Walmart costs $3 at the airport? Because you’re a captive audience. You have nowhere else to go and you want water (and somehow you seem to have ignored all the water fountains spread around the airport, but that’s another matter…), where else can you go? The folks at Hudson News know that you’ll pay $2.50 for a bag of M&Ms, $3 for water, and more for that bag of Jerky. They don’t have to be masters of supply when they are masters of demand.

If you have some sort of exclusive access to a market or some significant competitive advantage to access a market where there’s enough demand to command a premium for a product, you’re in good shape. This is why, conceptually, selling $0.35 sticks of gum for $2 each at a nightclub makes sense. This is also why there’s a $6 convenience fee for withdrawing money from an ATM at a Casino.

But this is also the reason why selling candy bars at school or for your non-profit works. You have exclusive access to a market. Some random shlub can’t sell candy to kids at school. No one else but you can get kids to your locker or at the back of the bus to buy your Pokemon cards for $10 a pop that you got from Mom for free as a stocking stuffer. Your inner-circle, your community, your constrained market is your advantage.

Yet this doesn’t scale. Once you get beyond your immediate market, you are faced with the problems everyone else has, lack of access to a market that you have competitive advantage in. If you need competitive market access to keep your sales price at a premium, then you might be forced to pay for such exclusive access. This will impact your cost of sales. This is why Hudson News isn’t the top retail leader. That $3 bottle of water probably cost them $1.50 in rent at the airport. And why can airports charge such a high rent? Because they have a captive audience too — the retail establishments who want exclusive access have nowhere else they can go.

What about “Arbitrage”?

In posing the original challenge, I got a few responses of the type below:

Take pictures of $1.00 items in thrift stores and discount stores. List them for sale on Craigslist for a higher price. If you get a hit, call the store and ask them to hold it. Buy it and resell it. Repeat. This can be done without the initial $1 by searching the Free section of Craigslist and relisting in the appropriate category for a reasonable amount. In either case, if the item sells before you get a hit, just tell the person someone else got it first.

And similarly:

I would go on Walmart.com and search for clearance items under a dollar that can be picked up for free in store locally. Then I would put it on Facebook Marketplace and put it up for sale for 2 dollars avoiding shipping and transaction fee costs.

These sort of scenarios where you guarantee your profit by simultaneously working the sell and buy side of the equation is called arbitrage. Is it just buying low and selling high as we’ve defined above, or is it something else? According to the definition here, arbitrage is defined as:

Arbitrage is buying in one market while at the same time selling in another market. In other words, it’s the act of buying something at a low price and then selling it on a different market right away at a higher price. Because you generate a profit, you’re essentially getting paid for your trouble due to the difference in price.

What’s happening here is the usual buy low / sell high strategy we discussed above, but you’re using some information, knowledge, and/or access not available to your buying market to gain a price advantage. This is a good way of optimizing a buy/sell strategy when you don’t have any other way of establishing low supply-side pricing or premium pricing on the demand side.

A similar sort of arbitrage is to sell the item before you buy it, but you have some risk involved in making sure that you can get your supply at the price and availability you are hoping, or you need ways to cancel the sale before it is committed. This is very much like a stock option and short-selling strategies.

Are you really selling what you think you are selling?

So to wrap up this extremely long discussion on what you thought was a really simple scenario (and there are nine and half more scenarios), we need to ask the question whether you are selling what you really think you are selling.

If you’re selling candy to your fellow kids on the bus or at the locker, then you’re selling a low cost product at a premium. Nothing unusual there. Buf you were selling the same candy bars door-to-door as a kid, raising money for non-profit, do you really think the people buying the candy bars are buying your overpriced chocolate bars because they crave the sugar rush?

No. You aren’t selling candy to adults who could just as easily buy it for cheap. And I would argue that the Stanford students who sold the sponsorships to their presentation or even perhaps the reservations at restaurants weren’t selling the products they thought they were selling either. They were selling something more intangible: support for a cause. In these situations, the buyer doesn’t really want your candy bar or necessarily even the reservation. What they want is to fund the cause you are looking to support. You could most likely just present a piece of paper that says you will provide them a chocolate bar at some point in the future or an IOU for a reservation and would have just as much success. Your cost would be zero and you would achieve the same outcome.

In buying products and selling them, you need to really know what the customer is buying. If they are buying the product itself, and the customer is price-sensitive, then you will compete against others that can easily replace you. But if you’re selling something more intangible, then gain more flexibility on price and a competitive advantage against others.

Why Buy Low / Sell High as a Doubling Strategy Doesn’t Scale

The reason why retail is in such trouble is because this model doesn’t scale well. Yes, you can easily double your $1 to $2 using the approaches above. You can probably also double $1,000 into $2,000 in a few steps. But can you easily double $1 Million to $2 Million just buying low and selling high? This is much more challenging to do. Why?

You can double your money in typical buy/sell relationships when the supply and demand are small. But you hit the wall when you try to scale because you run into these problems:

• Market size too small — Selling a dozen or even hundred boxes of Girl Scout cookies is one thing, but try to sell several thousand boxes on your own. You’ll find that you’ll run out of doors to knock and friends (and friends of friends) to bother. Once you run out of your target market, you’ll be forced to compete in the general market where demand is most likely much lower and price competition much higher.
• Supply side cost advantages limited — You can only buy so much product at a discount before you lose the ability to negotiate and purchase further. In fact, if you buy all the supply of some product, even at an initial significant discount, the increasing scarcity of that product will force its price up, causing you to give up any supply side price advantages.
• Cost of sales doesn’t scale — It’s one thing to sell cookies door to door on your own. It’s another to hire an army to sell the thousands of boxes you purchased. All of a sudden what was a highly profitable business on your own becomes a rapid money and time suck. Something that worked when it was small just doesn’t work as well when it’s large.
• Market access is limited — If your primary advantage is exclusive or constrained access to a market, once you exhaust that market, you will hit the wall on your ability to scale. Hudson News is already in every airport, train station, and similar constrained market possible. How can they double their business now?
• Risks increase as inventory increases — As you scale up your sales, you will necessarily have to purchase more supplies. The more supplies you purchase, the more you risk holding onto them too long. Holding onto them too long is a risk because demand can decrease, new suppliers can enter the market disrupting your competitive position, inventory can get damaged or disappear, and markets can change.

As you can see, turning $1 into $2 by buying low and selling high is one thing. Doing that turning $1 Million into $2 Million is a whole other ball of wax.

We’re Just Getting Started

So if Buying Low and Selling High isn’t a primary strategy for doubling money, what other strategies work? Stay tuned for the next few articles on this topic!