Why Arbitrage is a Good Fit for a Retirement Lump Sum Portfolio

Warren Buffet often refers to his first investment at the age of eleven in 1942 that cost $14.75. Today, given the reinvestment of dividends it would be worth some $400,000. He quotes the example to illustrate his success with investing for the long term.??

As a recently retired investor funding the next twenty to thirty years is a daunting task. Indeed, you will need to strategise a balanced portfolio that enables the lifestyle that you desire with your financial advisor.

To understand the role that Managed Arbitrage Automation can play in a retirement portfolio, we need to explore the broad field of investment opportunities. In building a balanced investment portfolio, benchmarking prospects against risk, return, and time will serve to offer the insight needed to make an informed decision.

The top three keys to investment success are arguably curiosity, patience and persistence. Curiosity drives the need to research and understand the underlying value proposition that an investment offers. Opportunities with a sound value proposition that delight customers with competitively priced goods and services must deliver above-average returns in the long term. Simply put, patience is needed to wait for the right time to buy, which is when the facts are to hand to make an informed decision and persistence is required as investment success is about long term averages.?

Putting your retirement capital in a saving account is Low-Risk, Low-Return that could be Short to Long-Term. There is a place for savings accounts in a portfolio that needs to offer ready access to limited funds in an emergency, but other than this; it is akin to sleepwalking. What is often overlooked is that when you withdraw your capital from a savings or fixed deposit account you only get your capital back; you get zero capital growth and given inflation your funds will be worth less than when you made the deposit.

In the long term, doubling, tripling, and more investment values are every day. In the short term, they are rare and generally, the risk is very high.? The appetite for risk is balanced with the skill that you have to pick e.g. high-return venture capital opportunities. Given high returns, the concept allows for failure while relying on average returns being high. Growing your capital base allows for you to leverage it to again compound your portfolio growth in long term investments. Suppose you are able to leverage property investments with a 20% deposit. R200,000 earned, after-tax, on an arbitrage investment will allow you to invest R1 million in say, a property. If the property earns 10% / R100,000 that's 50% on the R200,000 invested, which in the long term, will yield a capital growth. Best is, because you still have the arbitrage investment sum of R100,000 you can do it again next year! Alternatively, a retired couple who achieve some R400,000 (pre-tax) in about 120 to 200 trading days from an arbitrage investment will be able to decrease their long-term investment dividend withdrawals. Thus, short-term, high-return investments enable capital growth.

Managed arbitrage automation can be a short-term, low-risk and high-return investment. If this is true, it must be snapped up, as it will be a gem in any investment portfolio. Before investing, however, you need to ensure that you understand the underlying markets that influence the availability of an arbitrage profit. If the mechanics are in place, it is a low-risk, high-return, short-term opportunity not to be missed, for all that can happen is that the opportunity ceases to exist.

Arbitrage is the simultaneous buying and selling of an asset in different markets to realise a profit between the selling price and cost. Each of the markets is likely to be volatile due to dynamic supply and demand drivers, and as such, profit opportunities will only exist for split seconds. To lock in the simultaneous purchase and sale that meets the defined criteria, the use of a Bot is invaluable.?

A Bot is a software programme that constantly analyses the available data in terms of predefined criteria and acts upon opportunities far faster than a human can.

Short term, high returns have traditionally been risky. In recent times risk has become a strategic asset in balancing low yield stability with high yield growth. Venture capital funds have become more popular since the nineteen sixties. With their popularity, the "law of averages" has been targeted to mitigate a single investment's risk.?

Traditionally, alternative investments were those outside the ambit of listed shares, government bonds, mutual funds and cash. Alternative investments were the playing field of high-net-worth and institutional investors such as a hedge, pension and insurance funds seeking high returns. The game involved balancing and strategising the risk, return and time involved in leveraging credit and borrowed capital to the advantage of fund partners.

The key to high returns lies in leveraging capital to access debt and credit to bulk up investing at a profit above the cost of borrowed funds. When making a profit, the overall return on own funds invested is magnified, but so is the loss should this eventuate.

The opportunity to participate in High-Risk, High-Return investments has been made possible by the internet, eCommerce, the availability of revolving credit to individuals, crowdfunding, stokvels, and other financial arrangements that have enabled leveraging for handsome returns.?

Traditional alternative investments include:

• ??Collectables:?Artwork, books, stamps, vehicles, wine and more.?
• ??Commodities:?Bitcoin, agricultural produce, oil, gas, gold and other metals.?
• ??Derivatives:?Assets derived from other assets.?
• ??Distressed Debt:?Debt due by an entity that may fold.?
• ??Hedge funds:?Collective investments in illiquid assets.?
• ??Intellectual Property:?Patents, Trademarks, movies, music etc.?
• ??Private debt:?Debt arrangements outside the banking arena.?
• ??Private equity:?Shares in online and off-line (Pty) Ltd companies.?
• ??Real Estate:?Land, buildings & infrastructure that offers leveraging opportunities.?
• ??Structured Assets:?The use of something that creates an income stream.?
• ??Venture capital:?Investing in startups.

The traditional problem with investing in collectables was that they were not easily tradable. The internet and the promotion of fractional ownership, tradable shares, if you like, has opened this opportunity to private investors.?

Many see Bitcoin as a commodity. However, many did not see the internet for what it became. The first website was published in 1994, and as swiftly we could see the establishment of a global digital economy.

Today famous sports stars, the Mayors of New York and Miami, and many Uber drivers?have elected to be paid their salaries in Bitcoin.?South Africa has ten Bitcoin ATMs.?Travala,?one of the leading hotel bookings sites, offers over two million hotels worldwide, with Bitcoin and forty other crypto-currencies as a payment option. In South Africa today, Cryptocurrencies are commodities and are not recognised as a currency. Trading profits are taxable. When Bitcoin becomes recognised as a currency, the reserve bank may pass credit for funds returned. There will be no R11 m cap to Arbitrage trading if this happens. Consider the following:

"Nigeria joins the Bahamas and the Eastern Caribbean Central Bank in being among the first jurisdictions in the world to roll out national digital currencies. China launched a pilot version of its "digital renminbi" earlier this year. In Africa, nations from Ghana to?South Africa are testing digital forms of their legal tender to allow for faster and cheaper money transactions, without losing control over their monetary systems."

Indeed, we live in exciting times.

Today you can buy shares in the most valuable stamp of all time; it is a?1c Magenta stamp from 1856.

"The British Guiana 1c Magenta (1856) was?bought for $8.3m (ï¿¡6.2m)?by rare stamp dealer Stanley Gibbons at auction in June. It was flown into the UK between two security guards in July, before being delivered to the stamp merchant in an armoured truck."

Internationally there is little that cannot be found on eBay, and in South Africa, a recent opportunity to list alternative investments, completely free of charge, has been offered at?www.webo.directory??The directory enjoys some 1.8 million hits a month and is an international directory focusing on taking Africa to the world.

To illustrate some examples of popular alternative investments that are collectively owned include:

• Art:?Shares in original art that entitle time-share usage.
• Tradable shares:?Speculative ownership in Comics, Games, Books, Sports Cards, etc with a view to making a capital gain.
• Private Capital:?Local businesses offering a payback rate along a timeline. Farming examples include:
• Peacan nut farming. Long-term, low-risk, high-returns on investment over some 10 years, yielding some 25% pa
• Superfruit farming: Long-term, low-risk, high-returns on investment in say, blueberries over some 50 years, yielding some 25% pa
• Truffle farming: Long-term, high-risk, high returns on investment of some 600% after seven years.
• Real Estate:?eg Corporate Office Block buildings offering (quoted returns are averages but actual returns are location related) an annual yield of about 7-10% and a long-term compound capital gain of some 5%.

High-Return Share Investment

Investing in tradable equities offers the advantages of supply and demand pricing largely based on corporate performance. Where your view on prospects is bright, and you act to buy shares before the prospects are common knowledge, you will stand to profit handsomely when you sell. At first glance, buying shares in a bull market ( a market in which share prices are rising) may be less risky than buying in a bear market (a market in which share prices are falling). At a second glance, you may wish to wait for a bear market as it is likely that you will be able to buy the shares at a discount, giving you a better long-term return on investment.?The trick is to find opportunities where the company offers an outstanding value proposition that delights customers and which you believe will serve the needs of a growing customer base in the future. Hmm… so who did it?

Here are the 10 best stocks of the past 30 years, measured by the wealth created between January 1990 and December 2020.?

1.????Apple:

Wealth created $ 2.67 trillion. Annualised $ weighted return: 23.5%. Country: USA

2.????Microsoft:

Wealth created $ 1.91 trillion. Annualised $ weighted return: 19.2%. Country: USA

3.????Amazon:

Wealth Created 1.57 trillion. Annualised $ weighted return: 31.1%. Country: USA

4.????Alphabet (Google’s parent):

Wealth created 979.1 billion. A $ w. r. 19.3%. Country: USA

5.????Tencent:

Wealth Created $691.7 billion. Annualised $ weighted return: 48.1%. Country: China

6.????Tesla:

Wealth Created $639.3 billion. Annualised $ weighted return: 65.45%. Country: USA

7.????Walmart:

Wealth Created $568.7 billion. Annualised $ weighted return: 13.5%. Country: USA

8.????Meta Platforms (Facebook's parent):

Wealth Created $553.7 billion. A. $ w. r. 30.4%. Country: USA

9.????Samsung Electronics:

Wealth Created $540.6 billion. A. $ w. r. 20.2%. Country: South Korea

10.?Johnson & Johnson:

Wealth Created $535.3 billion. A. $ w. r. 13.9%. Country: USA

See the top 30 here

In the short term, what to buy and when to get out become complex considerations that have less significance when investing for the long term.?Suppose you would have invested, for the last 30 years in the listed shares above; you would have seen many bull and bear markets but armed with a long-term view you would have had no concerns because you would have been a "believer" in the underlying value.

Arbitrage has much in common with high-frequency trading. It is about accumulating small profits often.?If you can do it to earn small returns hundreds of times, over and over, then it is akin to adding drops to a bucket. Without understanding the mechanics, many that may be faced with the opportunity will write it off as a scam, because they do not have the curiosity to take the time to understand.

Private Equity

Private equity investment may render high returns given the high demand for goods and services that enjoy a high markup. Venture capitalists often say that they invest in people and ideas as running a small business is more complex (because management must do everything) than running a big business. Often the key to success is the passion for persisting at delighting customers.

Managed Crypto Asset Arbitrage Automation between South African Exchanges and Offshore Exchanges.

If I purchased medicine by the bucket in the USA, could I sell it for Two hundred per cent of the cost in SA? Again, some may think I'd need to be a magician or a scam artist.?Those with the curiosity to investigate will establish the following:

If I spent R100,000 on a rust-free car in Pretoria, could I sell it in Durban for R102,000? I am sure that you could because inland cars are rust free, while rust is the automobile plague in coastal towns. So far so good, but what would the selling price need to be to cover all your costs of acquisition and transport to Durban or another coastal city? It is done, but it is not a passive income stream. Likewise, flipping houses can realise profits that can accumulate to be a lucrative return on investment. Crypto asset arbitrage is similar to the above examples of flipping houses or buying cars for resale. The difference is the time and effort required. You would need to do the maths around more significant profits less regularly versus smaller profits frequently. The former examples are hands-on, whereas managed arbitrage automation is hands-off passive income.

As a consumer, we're conditioned to accept less. We tend to benchmark investment returns against interest rates offered by banks. Arbitrage has nothing to do with investing cash to earn interest income. It is about investing in an asset that is to be sold at a profit over and over. The result is the accumulation of small profits adding up to a lucrative return on investment.

If I were buying from a manufacturer to sell at retail prices, marking up the product cost by one hundred per cent would not be unusual.?

Expect a markup as high as 300%+ on restaurant wines; Diamonds could be marked-up some 200% to 400% per cent; Groceries from 50% to 100%; Name Brand clothing from 200% to 300% and medicines could be marked up from 200% to 3,000%.

Why should you not think that doubling or tripling your investment is possible when it is not interest-based, but rather it is based on selling an asset where the prices are based on supply and demand in different markets.?

This is how Abreo Manual Arbitrage Automation works. Abreo identifies a preferred Bot that is expected to deliver the desired profit.?

It is Low-Risk because Abreo Bots never buy unless the Bot has identified a simultaneous sale to secure a small profit instantly. On a daily basis your funds are withdrawn from the on-shore exchange for deposit into your trading bank account. In addition, funds are held in your name in your trading bank account, and you can access and or withdraw your funds at any time whatsoever before they are transferred to your foreign-exchange account (also held in your name).

It is High-Return because Abreo repeats the R100,000 trade 110 times (within the R11 million South African foreign investment allowances), making some 2% net after transaction costs that will amount to a return of 220%. There will be times when a 2% net margin is not available. Suppose this happens, and it will, all you need do is have the patience to wait. Markets are volatile and waiting will reserve the foreign allowance to be used when the targeted profit is available. Over the high season demand for tradable assets often subsides leading to lower prices. If prices fall this is not a problem to arbitrage trading for it is the margin that is the focus. The Abreo strategy is built around a timeline. In the "Wendy then William" example below double the foreign allowances only requires 118 days out of 260 in a year. This means that when margins get tight you can wait for your target margins to return for just over half the year.

In summary, it does not matter if the price of the crypto asset purchased is going up, down or sideways.?

All that matters is that there is a trading margin between the purchase cost and selling price that delivers a small profit after all transaction costs.

There is no parallel between stock or crypto trading, interest-based investments and Arbitrage. Arbitrage is based on instant profit-taking opportunities. Stock & crypto trading is based on pricing from time to time, and interest is a percentage return on the capital invested for the time invested.

Family Wealth Creation is about a partner donating the proceeds of the income generated by a partner to the other so as to create a lucrative return on a single capital base.

As an example, Wendy and William have R100,000 to invest in an arbitrage investment. In South Africa, there are no donations tax implications relating to donations between spouses. The Foreign Investment Allowance (FIA) certificate/PIN is valid for the calendar year, with 260 trading days calculated at five days per week. This allows them to trade with their combined capital, one after the other, which will dilute the Fixed Transaction charges by some R33,000. The financial data is drawn from the detailed spreadsheets that can be downloaded on the www.abreo.co.za Blog Dashboard dated 14 November.?

Profit, in South Africa, is a function of the net margin earned on the R1 million Single Discretionary Allowance ( The SDA is available to all SA citizens over 18 years of age that are registered taxpayers to enable them to take funds offshore) and the R10 million FIA allowances. Securing double the allowances (R 22 million) while trading with the same shared capital spouses can massively leverage and improve their return on investment.

One R50,000 account is profitable. Two R50,000 accounts are better than a single R100,000 account. The best option is a single R100,000 investment that one spouse first trades until the S D A and F I A allowances are depleted and who then donates the final balance to the other spouse who trades to the full extent of the second set of allowances received.

Conclusion

An investment of some R100,000 will be a gem in a retirement portfolio as it offers a unique opportunity for low-risk, high-return, short-term investment that will significantly boost the capital available to leverage alternatives for the balance of any calendar year.

Contact

If you are a South African with an investment portfolio contact Abreo, at www.abreo.co.za Abreo is a division of Webo, founded in 2004. For a detailed tour of how to benefit from this opportunity to include arbitrage to South Africa in your retirement portfolio book a one-on-one consultation at www.calendly.com/weboam?

#Arbitrage

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