Starting your journey building a LEGO investing and reselling business is extremely exciting. I still remember how I felt when I began to realize the opportunity and potential.
When I saw the return on investment that was possible as I researched my first set to purchase, the adrenaline kicked in. In those moments, it can be easy to lose your head and jump head first in – sell all of your other investments, and go all in on LEGO.
That’s how mistakes are made. It’s much harder to maintain discipline and a level head when things are exciting. As you start or grow your LEGO investing business, it’s crucial that you think like an investor.
So let’s take some quotes and lessons from perhaps the most well known investor in the world, Warren Buffett.
Understand the Risk
“Risk comes from not knowing what you’re doing.”Warren Buffett
Over time, we can learn how to reduce the risk involved with LEGO investing. However, it is important up front to admit that there is risk, and to understand it.
Any time you buy an investment, you are taking on some level of risk. LEGO is no exception, and although the returns are extremely high, the risk can also be higher than buying more traditional assets such as a stock market index fund.
It’s important to come to terms with that risk before you begin. If you are extremely risk averse, take that into account when building a strategy. For example, you may want to allocate a smaller budget to LEGO investing, and diversify into other investment assets such as the stock market.
If you are fine with risk, there are other things to watch out for. Some people can be TOO OK with risk, to the point that they make bad investment decisions. Try to find a balance. Understand the risk involved, and try to get comfortable with it, but never too comfortable so that you are careless.
The risk can be dramatically reduced through education. Which brings us to the next point.
Understand the Asset
“Never invest in a business you cannot understand.”Warren Buffett
If you buy stocks, the easiest way to lose your money is not doing your homework and making sure you fully understand the business you are buying. This is one of the things that Buffett preaches the most on. He believes strongly that one of the overall most important aspects of investing is to deeply learn about the asset that you are buying, and don’t buy something you don’t understand.
Learn as much as you can about the world of online reselling and LEGO investing before you begin. Learn about the themes, sets, licenses, expected retirement dates, retailers, deal calendars, selling platform, fees, and every other aspect of the game. This will drastically reduce the risk involved, and increase the chance that you will be successful in your investments.
Understand the Numbers
“If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.”Warren Buffett
Buying an asset before you fully understand the numbers is speculation, not investing. Like any business, you need to have some sense of certainty that an investment will pay you more in the future than you are paying for it today. Assuming that this is the case is not enough – you need to try to build a deeper understanding of the potential profits in order to make good investment decisions.
Learn about the fees and costs involved, as well as potential selling prices for the themes and sets you are interested, so you can draw educated estimations for profit margins and return on investment. Over time, you will get fast at doing these estimations, and will be able to make buying decisions much quicker. But don’t skip this step, as it is the difference between making money and making mistakes.
“We don’t have to be smarter than the rest; we have to be more disciplined than the rest.”Warren Buffett
As with any other investment, we are in this for one reason – to make a profit. It’s important to always remember that, and to avoid making any decisions or buys that don’t meet your exact requirements.
When you start your LEGO investing business, it is a great idea to focus in on specific themes or sets in order to specialize. It will take discipline not to jump on that -40% deal on Amazon for a theme you are unfamiliar with. Don’t do it. As we talked about above, understanding the asset is crucial. Keep a level head, and remember that there are tons of opportunities in your area of expertise. Don’t stray from the path.
Likewise, you will need discipline to avoid over-spending and over-extending yourself. As you find great deals, it’s easy to get caught up in the adrenaline. Try to remember to be disciplined. Stick to your budgets. Stick to your numbers.
Avoid making decisions based on emotion!
“You can’t produce a baby in one month by getting nine women pregnant.”Warren Buffett
This is a great quote by Buffett. His partner, Charlie Munger, once gave another amazing quote about patience. It went like this:
“You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.”
We use the word “investing” when talking about LEGO arbitrage because we have a wait time or ‘holding period’ before we sell the sets. During that holding period, the set appreciates in value.
It’s crucial to be patient during that time. Don’t sell too early. If you learn to buy great deals, you’ll be able to flip the set very quickly for small profits. But if you wait until the right moment to sell, your returns will be far better, for less work.
Diversify at the Start
“Diversification is a protection against ignorance.”Warren Buffett
Diversification means buying multiple different assets, so if one doesn’t do well, others will make up for it.
In the beginning, this is a great strategy, because you won’t have the experience to choose excellent sets to buy. You may not know the retirement schedule, and if you put all of your money in one set, that money may sit on the shelf for a year before it even retires, and then another 18 months before you sell it.
As your experience grows over time, the need to diversify is reduced. You can make great buying decisions, and it might make more sense to go deeper on a handful of sets rather than go broad with a handful of units in many sets.
However, something we always need to keep in mind in LEGO investing is that it takes time to liquidate our position. Selling 500 units of a set will take time. It might make more sense to sell 100 units of 5 different sets. The same customers may even buy a few sets from you, in that case.
Diversification should be an important part of your strategy.
Ignore the Hype
“Speculation is most dangerous when it looks easiest.”Warren Buffett
In the stock market, hype can make stocks get way overvalued. This was the cause of the ‘dot com bubble’ back in the early 2000s. It’s common to see companies reach ridiculous stock prices due to the excitement around them, even if they’re not making a profit. Warren Buffett would argue that this makes no sense as an investment.
In the LEGO investing world, the hype can be a lot to handle. There is often a bandwagon element in LEGO communities, where investors and resellers buy sets that weren’t on their radar because other people are buying them.
Stick to what you know, and stick to your own research. Everyone has their own strategy. If you hear people talking about buying a set that has just been released, but you usually don’t buy sets until a year after retirement, the hype can make you forget your own strategy and jump in. This makes no sense.
Don’t listen to hype – always go with your own research and stick to the plan.
Be Ready to Seize Opportunity
“Opportunities come infrequently. When it rains gold, put out a bucket, not a thimble.”Warren Buffett
When a great opportunity arises, you need to be ready for it. In the stock market, these opportunities can come from sudden drops in the market, such as a correction or crash, or drops in a specific stock price. If the underlying business is still stable, the drop in stock price can be seen as a discount, or sale price. Buffett makes his money by buying businesses when they are on sale.
In our LEGO world, it’s the same concept. If a great sale comes online, there’s nothing worse than not having the capital ready to buy sets at great discounts.
We need to prepare for this. The quote here essentially means that when those opportunities come up, we want to have the money to go big.
If we are ready for great deals, then we can capitalize on them when they come along. Our LEGO reselling businesses will do much better as a result.
Create a Margin of Safety
“The three most important words in investing are ‘margin of safety’.”Warren Buffett
‘Margin of safety’ refers to creating a cushion within the margin of an asset you buy, so that even if the value does not increase as you hope, you would still not lose money.
In the world of stocks, this means buying stocks that are undervalued. If the stock is priced low relative to the financial strength and potential profit of the business, then the investor has a high degree of certainty that the stock price will increase over time. Even if it doesn’t increase, it is very unlikely to decrease because it is being bought at such a low level.
In LEGO, it’s the same. We want to buy sets at such good deals that we have a margin of safety. Even if it doesn’t go up in value much after retirement, the chance of us losing money is slim. Even if we sell it at RRP, we can make our money back after selling fees.
That’s what we need to aim for in order to protect our investments.
Stick to Your Strengths
“You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”Warren Buffett
In line with the fact that it is risky to not educate yourself, it is also risky to not stick to what you know.
As you learn about different themes, sets, selling platforms etc., it’s crucial to leverage your strengths. Try to understand where your circle of competence is. What theme do you understand well? Go big on that theme, and avoid buying themes you don’t know much about. Over time, your knowledge will increase and you will expand your portfolio.
Don’t expand into areas you don’t understand, and make sure you’re ready before making big investments.
Now, go out there and get it!
We can all learn from Warren Buffett’s investing philosophies. I hope you see the value that they bring to the table for us as online resellers and investors.
Do you have any other investing tips that you keep in mind for your LEGO business? Let us know in the comments!