After reading this you should be familiar with some nuances of the sneaker game and why it is related to active investing. Additionally, you should have thought of other ways active investing is relevant to everyday life. To help there is this cool quiz to test what you’ve read in this post.
If you’re a parent you’ll be equipped to teach your kids finance using unique examples.
A Sneaker Game Retiree
I’m out of it. I bowed out and hung my jersey in the rafters around the time I got married. It wasn’t a great use of my time and family finances when I decided to propose to my wife. However, relics remain of what used to be common components of my wardrobe back in 2008-2011.
Foamposites, Jordan’s, Nike SB and others, I was always on my watch list. I boosted my awareness of shoes by subscribing to shoe websites and placing release dates on my calendar. Real methodical. When I could get my hands on a pair of shoes, I would try to get two pairs. This happened three times, each feeling like Christmas. I was able to procure the Nike Copper Foamposites; Jordan Brand Cool Grey XIs; and the Nike SB 420 Skunk Dunks, all as double acquisitions.
Do it in twos
One day I called my friend RJ up to get me an extra pair of the copper foams. I know he went through a bunch of trouble to get them, but like an ace in the hole, he sent me a pair all the way from Norfolk, VA. This was awesome of him because, I lived in Baton Rouge, LA at the time (a true friend). I would have done the same for him at a moments notice. I even asked my wife (girlfriend at the time) to buy me an extra pair of the Skunk Dunks (they were hard to get and looking back I shouldn’t have asked her) as well. Finally, I was lucky enough to get the Cool Grey’s straight from Nike during the Christmas holiday season. I know what you’re probably thinking, “All this for shoes?”. Many of my associates didn’t understand as well… why someone would “buy two pairs of the same shoe.
Well, shoot, if you understand economics you will understand why immediately. The biggest reason most sneakerheads do this is due to a term I heard explained back in 2013 by the co-founder of Tastytrade and ThinkorSwim, Tom Sosnoff.
“COST BASIS REDUCTION”
It is a simple concept that is fairly common. I did it in the shoe game, and if you rent, you’re basically helping your landlord do it. See, usually, sneakerheads don’t purchase two shoes unless they can sell them above the purchase value. Not to mention, they probably want to keep a pair to wear. So “Cost Basis Reduction (CB)” comes into play, allowing the sneaker head to look good in his sneakers while making a profit. Here is an example of it, put simply.
COST BASIS = The amount something costs to you. So for $100 sneakers, the CB is $100.
REDUCTION = The action that takes place that reduces the CB. Selling a second pair that increased in value.
So here is a weird example. Say I bought a pair of Nike AirMag (Marty McFly) shoes for $8000. Extremely rare pair of shoes, for an extremely stupid price….but just bear with me. These would likely get a small amount of wear, so they’d turn into glorified trophies. Also, they are very awkward and shouldn’t be worn in regular settings anyway. Knowing that I put these shoes to use as an asset instead.
I find a group of pretentious folks who really want to dazzle at an A-list event. The poor blokes don’t have $8000 but they have enough to look good for the night. I tell them that the highest bidder can rent them starting at $30 and if damaged, they would be responsible for the full value of the shoe. The winning bid was $100. The lucky bidder wore them, took beautiful photos in them and the shoes were returned to me in great condition.
What just happened here?
- I reduced the cost basis of my $8000 shoes to $7900.
- The rentee took care of the shoes due to the fear of loss embedded in the rental agreement.
So If I decided, in this weird example, to rent my shoes more times…I could further reduce the cost basis of the AirMags.
I purchased two pairs of limited Jordan Brand Retro 11 instead of one. Let’s say, the Concords, because I never owned a pair and using them in this example makes me feel better. I know I want to keep at least one of the pair and I know the value will likely appreciate (remember market awareness).
I wait until the price for one is at least 200% more than the manufacturers suggested retail price (MSRP). This is because once I sell one pair, both pairs essentially have a cost basis of $0.00 now. This means I got a pair of shoes for only the price of my time and net-net, you don’t have a financial burden left in this “shoe trade”. 200% is ideal and can happen given the right shoe at the right entry and exit times. However, sometimes it is better to get a lesser profit percentage and move to the next shoe release. When you continuously sell at a smaller profit, selectivity isn’t needed. You get a predictable profit and move forward. It’s akin to hitting the easy lay-up on the basketball court instead of shooting the less efficient mid-range shot.
So How Do Selling Shoes Relate To Investing?
Everything! In the “REASONABLE” example, a common investing practice took place. Investors take something at a certain cost and realize a profit on it by selling it at a higher cost to a buyer. You don’t have to be Warren Buffet to understand that. Also, investors know their domain (i.e. their market). For sneakerheads who engage in the sneaker market, they know release dates, MSRP quotes, previous release performances and more. For real estate investors, they know the peaks and valleys of the real estate market, construction costs, the rental market and where their sweet spots are for entering and exiting a deal. Both of these are examples of real-life investing.
But what about the “active” and “cost basis” part?
About time you asked. Active investing simply means you are engaged in the management of your investment. The opposite is “PASSIVE” investing. Passive investing is most apparent in purchasing assets and letting them run their course, outside of your control. Think about buying stock in the stock market, or …purchasing a collectible. If you do nothing and realize a profit … you have passively invested. However, the caveat for passive investing is no cost basis reduction. That is important to understand because what you paid for in terms of the shoes or stock is always at risk until you sell it.
Active investing is analogous to the business a landlord engages in. They buy or finance a property for a certain amount of money. Chances are they are renting it out at a profit. Well, that beautiful profit they are realizing monthly is providing an essential cost basis reduction to the cost of their property. Do you see the difference between Active and Passive yet? If not, let us go back to that weird example above about the gentlemen renting his AirMags to the A-List party goers. His act of renting out the shoes is coming back to reduce the ridiculous price of those shoes. Clear concept?
Now you should be able to comprehend the basics of Active Investing and what the heck “Cost Basis Reduction” means. This was shown by explaining how participants in the secondary sneaker market apply this by buying two pairs of shoes and selling one within their sweet spot of profit. We then attached the concepts of active investing and cost basis reduction to the actions taken place by those participants. At this point, you should be more confident about exploring introductory concepts of investing. If you are not, leave a comment below and we can venture further into these concepts.
“So what does this active and passive investing have to do with me?”
Again. Everything. You are here because you want to learn more about investing or the shoe portion caught your attention. What you should do now is engage below in the comment section with me and others. If you have a question about investing related to this post, ask it. If you want to answer a question, type one. For now, I will leave you with this question…
What about investing do you want to know more about?