Portfolio Management: Part 2

Yesterday, I showed how to setup a spreadsheet to track your portfolio of products that you are trading on the Trading Post. Today I will quickly go over some of the key things you should be tracking, and how to easily go about it.

Trading Post Fees

Trading Post fees are easily to calculate. The cost of posting something is five percent of the sale price. Thus, if you post something for one silver, the cost of making the post is five copper. If you cancel the sell order you do not get this fee back. The Trading Post also takes another ten percent when you make a sale, so for then item we posted at one silver, we will be charged another ten copper when the items sells. All-in-all the TP takes fifteen percent of the final sale price, with five percent being upfront. Now, that means that you will essentially take home eighty-five percent of what you post an item for. In other words/, to make a profit selling at one silver, you have to buy at lower than eighty-five copper, or in general, you need to sell for at least, 17.6% more than you bought for.

Trading Post Fees.

It is important to know this fact, because this is your only expense. This expense will determine whether you make money or loose money. A calculator is enough to figure out your break even points, and my spreadsheet factors this in automatically. Another handy tools is tpcalc.com. It simply does the calculation describe above showing you your costs and profits.

COGS and Inventory

When we talk about Cost of Goods Sold we must also talk about how you calculate your inventory. There are a lot of different ways you can do this, and a lot of different ways it is done in the real world. There are three major systems, First-in, first-out (FIFO), last-in first-out (LIFO), and average cost. My spreadsheet uses average cost, because it is the easiest to implement on a spreadsheet. I simply add up the amount you have paid for a certain product and divide by the number bought. This is the average price per unit used to calculate Cost of Goods Sold.

Average cost inventory.

Intuitively, most probably use a FIFO approach. This means that the first price you buy at is the cost you take into account when you go to sell. If you bought eggs on Monday for 20c, on Tuesday for 25c, and Wednesday for 30c then you started selling your eggs on Friday you would first consider the price you paid on Monday and would have to sell at 24c to make a profit. As you work through your inventory your costs would rise and you would have to raise your prices.

LIFO on the other hand would have you sell the eggs you bought most recently first. Thus you would sell those you bough on Wednesday first and work your way towards the cheaper eggs you bought on Monday. In general costs of goods rise as time goes on. Inflation, in general, is driven by an increase in the money supply. As there is more money available people are willing to pay more for things. Thus, in general, FIFO will have you selling your cheaper goods first, and LIFO will have you selling your more expensive goods first. This is a general statement though for the long term, and doesn't apply to the short term, nor necessarily to the long term either.

It does bring up an interesting thing to consider, though. Do you sell your more expensive inventory first? or the cheaper stuff? If, in both scenarios you sell for the same prices, than it has no affect what-so-ever on your profit. In the real world, companies use different methods to make their business looks more attractive to investors. In this game, it really only matters to you. If you prefer to get the expensive stuff out of the way first, then do that. If you prefer to see big profits quickly sell your cheaper stuff first.

In the end, use the inventory system that works for you. Then use this system to arrive at the Cost of the Goods you are selling. This way you can effectively evaluate your trading post fees and profits. Even if you do not apply this to your trading in game, I hope you learned something about real world accounting.

Percentage of Inventory

Another important statistic I like to track is the percentage of a certain good as it relates to my total inventory. For example if I have ten gold in eggs, how much as a percentage is this of my total investments of one hundred gold? In this case ten percent. This is a good thing to track, because it shows how diversified your investments are. Having 100% of your inventory in a single good means that you have not diversified and your future hinges on a single market. If, however, you are invested in twenty different commodities and each makes up roughly five percent of your total inventory you know that any markets that bottom out will be covered by your other investments. 

My current inventory, as a percent of the total.

This is not to say that there aren't markets you should invest heavily into. It is a judgement call you have to make. Charts and graphs can help you make these calls. They can also give you signals as to when you have bought enough, and when it is time to think about looking for opportunities to sell.

Profit

The final, and most obvious stat to track, are your profits. For starters it is a moral booster to see this number slowly growing and to know your efforts are paying off. Secondly, once you break profits down to margins and start examining them on the basis on each commodity you will see where your efforts are meeting the most reward.

Based on current (Dec. 11th) prices
 my expected ROI shown per commodity

Simply, profits equal revenue minus costs. Sometimes this is also referred to as gross profits and since we have no other costs this is also our net profit. Above we talked about how to track your costs. Your revenue is simply what you sell the good for. If your revenue is higher than your costs, you are in the black and making gold. Otherwise, you are in the red and taking a loss.

Next, you can calculate your return on investment (ROI) so that you know how well your money is working for you. The calculation for this is simple, take your net profit, and divide by your costs (Cost of Goods Sold, and TP fees). This is the percentage of what you invested that has been returned to you. The higher the ROI the more lucrative the trade. ROI is not the be all and end all though. Trades with a low ROI, but a high turn over may be more lucrative than a high ROI with slow turn over.

Conclusions

The point here is to give yourself the tools to analyze the strategies you are using going into the market. This way you can re-double the efforts that are proving successful, and abandon those that are not. You can also examine the numbers closely and see where you went wrong and how to avoid future disasters, and on the flip side you can see how you succeeded and apply those strategies in other areas. Not only that, but the morale boost given by seeing your numbers rising, bars on graphs growing, is quite telling. Instead of abstract numbers in your head, it starts to become a real thing you care about and want to grow. Either way, the point is to have fun. If this is not fun to you, than do not do it. Continue with whatever systems you have in place that are working for you.