Newsletter #17

Hi,

I was listening to Alex Hormozi’s podcast, The Game, this week, where he spoke with the founder of Butcher Box… they used the word "arbitrage" like 500 times. It made me realize that I don’t actually know what they mean when they say arbitrage.

This has no bearing on the actual newsletter today, but here’s a funny story: After college, I moved to Scottsdale, AZ, and lived with two of my best friends. Every Friday or Saturday, we’d have a conversation about whether we wanted to take on the town and be boys of the night. One week, the word contingent came up, and it was being tossed around very loosely—potentially out of context. Ever since that night, I have had no idea what the word contingent actually means because I heard it used in too many different ways.

That’s how I felt after hearing this podcast and the word arbitrage too many times.

So, I’m going to try and decode what I think it means and how it might help us all.

The actual definition of arbitrage is taking something that is cheap in one place and selling it in a place where it is more expensive.

The person who does that keeps the difference.

The first context in which I understand arbitrage is drop-shipping. Here’s the basic business model of drop-shipping:

1. Find a product made in another country for cheap.

2. Find a warehouse/manufacturer who will fulfill orders directly to customers.

3. Advertise the product online.

4. Sell the product to a customer for more than it costs you to buy, advertise, and ship it.

Said more simply:

Profit = Total Price - (Product Cost + Advertising Cost + Shipping Cost)

If I sent this to you and left out drop-shipping or arbitrage, you’d probably say, “That’s just the gross profit margin of a business.” And you’d be right.

So does that mean all business is arbitrage? Maybe… honestly, I don’t really know.

Let’s try to apply this idea to skill. This is a thought exercise, so bear with me:

• Person A is good at coding websites.

• Person B is not good at coding websites.

• Person B needs a good website to sell their woodworking (which they are good at).

• Person A codes a website for Person B in exchange for money.

Outcome:

• Person B saves valuable time by paying Person A to make a website.

• Person A makes more money coding a website than they would doing something else.

In this example, two things are happening:

1. Person A’s time coding websites is more valuable than Person B’s time coding websites.

2. Person B’s time not learning to code is more valuable than the money they pay Person A.

Person B trades money for Person A’s time.

This is skill arbitrage.

I think we now have a pretty good idea of what this means—so onto why I went through the painstaking effort of explaining it.

When You Start Something New

Whether it’s a new hobby, an exercise routine, or a business, there’s always a learning curve. You can pay people to teach you the lessons and expedite the growth curve—we call those people teachers, coaches, and employees.

We all intuitively understand this, but we rarely apply it when we are the ones selling knowledge. We often undervalue what we know, creating an arbitrage opportunity for others.

A great example of a business that thrives almost entirely on skill/information arbitrage? Marketing agencies.

The Hero’s Journal & Marketing Agencies

There are two ways I can tell the story of The Hero’s Journal: chronologically or thematically.

Today, we’re going theme-based. The topic? Marketing agencies.

In 2021, we decided to hire our first agency to run our ads. The idea was simple: We didn’t know what we didn’t know.

Most of these agencies operate by taking a percentage of your ad spend as their fee, plus a minimum retainer. For example, if you spend $30,000 on ads and they charge 10% of ad spend, they receive $3,000.

The logic is that their historical knowledge is worth more than 10% of your ad budget. Plus, since their only focus is advertising, they should have their ear to the ground on industry trends. In theory, we weren’t just paying them for current knowledge—we were paying for access to a growing knowledge base.

But here’s the issue with agencies:
When they sign you, they put their top people on your account. You might be working directly with the agency owner, their best ad buyers, and their best account managers.

Over time, though, those top people get reassigned to bigger accounts.

You start with experts who have more experience than you do. But overnight, the person managing your account might have less experience than you have just from working with the agency.

Not a great trade.

The result? Ad performance drops, the client (you) gets frustrated, calls the agency, and threatens to cancel. The agency offers to put top people back on the account. And this cycle repeats until you leave.

The issue with skill arbitrage is that both sides want to get the outsized value—we want high-level expertise for cheap, and agencies want to make the most money off their expertise.

To protect ourselves from this, we set a rule for anyone we work with:

They have to be consultative without being a know-it-all.

There’s a fine line between being consultative and just liking to hear yourself talk.

We set this rule because if we work with an agency for six months and they’re actually consultative, even if they eventually put a junior ad buyer on our account and we have to part ways, we still walk away with knowledge.

Our money didn’t just buy time—it bought insight.

Atypical

Trey’s knowledge and skill arbitrage is pretty obvious. By creating videos about professional basketball, injuries, and life overseas, he gives his audience free value.

So what does he gain from it?

Attention.

And in today’s world, attention is one of the most valuable currencies.

One day, by giving away as much information as he can, he can cash in that attention for the currency he actually wants.

The key takeaway? Just because he’s cashing in on attention doesn’t mean it negatively affects his audience. A win-win situation is very possible.

Reading & Podcasts

I’ve been slowly working through that book (still), but lately, I’ve been on an absolute podcast kick.

Here are two really good ones I’ve enjoyed:

Steve Magness on Training: Podcast Link 1
Alex Hormozi and Butcher Box CEO: Podcast Link 2

They’re pretty niche, but I think they’re worth a listen.

Coffee

This week, I’ve been making a lot of lattes. And I’ve really been enjoying them.

It made me think: sometimes, we benefit from the time our younger selves invested in a skill.

I’m so thankful that 23-year-old Kyle decided coffee would be his hobby—because now, I get to make delicious coffee at home.

Conclusion

This week’s newsletter was pretty topic-specific, but here’s an extra lesson for you:

Domain Dependence – the inability to transfer knowledge from one field to another.

Arbitrage is usually used in economic contexts, but pulling the idea out and applying it elsewhere is an example of breaking domain dependence.

Throughout your life, you’ll find connections between seemingly unrelated things. The faster you recognize them, the more you can benefit.

Little end-of-newsletter value for you.

See you next time,

Kyle