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| "Three fer a dollah," the guy behind the counter said to me yesterday. "But what I if just want one?" I asked. "That'll beeyuh quarta." We were driving from Florida to Tennessee for a quick family vacation in the mountains. I brought a guitar. But I forgot a pick. So I popped into a music store... Three for a dollar – that's 33 cents each. But one is only 25 cents? I wanted to point out his math error... But the store was busy. The boss was right there. And it's eight cents. Do I bruise the guy's ego AND get him in trouble with the boss – over eight cents? Maybe I should have... But I didn't. Most people believe the saying "it takes money to make money." But it's not true... The biggest "mispricings" occur in the little stuff, where a big investor won't bother. When I worked for a $1 billion hedge fund, my job description was simple: Find ideas that can make a profit of $25 million and figure out how to best to eliminate the risks. But that's hard to do! It's hard to find things where you can make a profit of $25 million without completely over-running the market. For example, I'd have to buy 500 million guitar picks at 25 cents and resell them at 30 cents to make $25 million. (And that doesn't include any other costs.) The guy behind the counter might sell me one pick at 25 cents. But somewhere between the first one and the 500 millionth pick, he'd figure it out. Of course, I wouldn't want to take advantage of his mistake. But there are plenty of mispricings for the little guy... Last week, I bid at a property auction in St. Augustine. The lot I bid on was a block from the beach. It ended up around $40,000. It wasn't in a fancy area (it was in Vilano Beach). But still, it was worth much more than $40,000. I didn't find any hedge funds or Wall Street investment houses bidding in this auction. Vacant lots in St. Augustine can't generate enough profit to be meaningful to these "big" players. Especially when you add in the costs of doing local research. Because there's so little interest, bargains result. Distressed local real estate is one area you should consider if you're looking for mispricings. Talk to a local realtor and ask him for a list of bank-owned properties... and a schedule of upcoming property auctions. One or two deals each year could generate a significant income stream for a "small" guy. Buying small-cap stocks is another way to take advantage of the big guys. Take the Boulder Total Return Fund (BTF) for example. It's a way to buy Warren Buffett's Berkshire Hathaway at a 22% discount. BTF's market cap is only $234 million. This isn't a problem for you and me, but for a professional money manager, it's a waste of time. There's no way to invest big money. The stock trades at a bargain as a result. (Use www.etfconnect.com to search for other small funds with large discounts.) Like a hedge fund can't buy auctioned property or illiquid stocks, I couldn't set up a business buying picks from this guy at 25 cents and reselling them for 30 cents. It'd be a waste of time – it's too small. (I wouldn't want to cheat the guy either!) But I can take advantage of the big guy when it comes to small stocks or local real estate. The opportunities in these sectors have never been better... for small investors. Good investing, Steve |