A couple weeks ago I made this observation:
There are 2 kinds of players on Empire Avenue. Those with a good ROI whose strategy is to invest in others with good ROIs, and those with poor ROIs whose strategy is to buy shares in others who will buy back regardless of ROI.
(Chris Voss pointed out a 3rd type of player – those like himself with so much wealth that they invest in anyone with a pulse, but since that’s a very small % of players I’m not going to go there in this post.)
The Pros of Buying High ROI
I have been firmly in the first group – the good ROI group – since I started EAv and have dismissed reciprocal buying strategies. The reasons are fairly obvious. Investing only in players with good ROIs earns you the highest dividends. And if you have a good ROI, you don’t need reciprocal buying agreements to get people to buy your shares and increase your share price.
The Pros of a Reciprocal Buying Strategy
However, I am beginning to have second thoughts about the high ROI strategy and am starting to give some serious thought to a reciprocal buying strategy. Here’s my reasoning:
- There’s a limit to how far a high ROI strategy can take you. It’s impossible to continue to increase your dividends by a half to a full percent each day because its impossible to increase your social media engagement that much that fast. Inevitably we will all reach a point where we no longer have a high ROI and others with a high ROI strategy will begin to sell.
- It reduces the pressure to constantly increase dividends. With the high ROI strategy, there’s pressure to continue to increase your dividends to keep up with your share price. That often leads to posting low-quality stuff to blogs and social media to increase divs rather than to engage your audience and provide them with quality content. I imagine that pressure decreases to some extent when you know people will buy your shares out of obligation to reciprocate.
- It reduces the pressure to be on EAv every day. Take a few days off from social media and EAv and your divs will drop. If you and your investors have a high ROI strategy, that drop in divs will probably produce a drop in share price which could spiral out of control. But if you and your investors have a reciprocal buying strategy, you don’t have that problem
- It reduces the tension between the game and friendships. With the high ROI strategy, there’s a constant tension when the ROIs of the people you’ve gotten to know in the game slip. Do you sell because it’s best for your portfolio? Do you hold because of the friendship? Will they get upset with you if you sell? That tension goes away with a reciprocal buying strategy.
- It saves time. With a high ROI strategy, it takes a lot of time to monitor everyone’s ROIs. It also takes time to make decision as to when to sell and when to hold. It’s much faster and simpler to make buying decisions based on who has bought your shares.
Obviously the downside to a reciprocal buying strategy is you earn lower dividends, but it may be well worth it.
Reciprocal Buying Communities
Oct 25, 2011 @ 15:48:02
I joined the #2powerN community 11 days ago and am pleased with the results. Stock price up from 76 to 96 and about 250 new shareholders. There are certainly limitations but it has given my stock a needed boost after being in the doldrums for a month or more. I tried the ROI approach and found some of the same issues that you had above. The reciprocal buying strategy is a much less stressful way to play this game.
The #2powerN community is here: http://www.empireavenue.com/community/?c=2326 but it allows no comments (I know, strange)
I started a community to discuss the strategy here: http://www.empireavenue.com/community/?c=2418
Thanks for a great blog, I recommend it to everyone highly!
Steve Bretzke
Oct 25, 2011 @ 16:49:48
Steve, thanks for your comment. I joined your community. When Andy first started touting the #2powerN concept/community I was a bit turned off by his aggressiveness & self-promotion. Then I saw some things that made it seem like he was running the group like a dictator and starting conflicts with other communities. But the results you’ve experienced are impressive. I’ll take another look.
Oct 26, 2011 @ 14:45:08
Great post. I personally am trying to run the high ROI strategy out to make some decent income, and then enter into reciprocal agreements after the activity of purchases and such draw down.
I almost have enough daily Divs now that I could buy 200 shares of most players. 1 a day of course. If I can get to the point where my Divs will upkeep a reciprocal buying strategy, I will definately implement.
Oct 26, 2011 @ 17:54:00
Adam, that’s how I think a lot of people end up doing it. An ROI based strategy seems great at first when you can keep your own ROI attractive, but it seems like at some point you won’t be able to grow your divs as fast as you’d like to grow your share price. At that point, unless someone has another strategy I haven’t thought of, a reciprocal strategy seems like the only way to continue to grow your share price.
Oct 25, 2011 @ 16:08:23
The problem with high roi strategies is share price. Because it’s the increase in share price that destabilizes ROI. Since div per share scales with number of shares, you can maintain ROI at a stable social activity rate iff your share price doesn’t spike upward too quickly.
So, since I tend not to see dramatic price spikes, I don’t worry about having to increase ROI. just about maintaining 1%. I’ll write more later about how buyback affect my strategy.
Oct 25, 2011 @ 16:56:20
Thanks Andrew. I don’t think I’ve experience a spike in share price. But my share price has increased steadily and is up 20% in the last month. I don’t think it’s realistic for anyone to increase their social media engagement by 20% every single month, and I’m not sure it’s a good idea to even think about trying. I see too many people putting the cart (EAv divs) ahead of the horse (providing value to their social media connections). I look forward to hearing more about how buyback affected your strategy.
Oct 25, 2011 @ 20:08:51
Took me longer to get to a computer (and typing on a phone was not that fun).
Anyway, with buybacks, I guess I feel a need to invest at least a little bit in people who invest in me. I still look at ROI, so if it’s not at least 1%, then I’ll only buy back up to ~5 shares (so I can watch). But supposing that someone has at least a 1% ROI, then I’ll buy back in them to share-for-share parity (which will generally escale until it’s 200 for 200).
The kicker is that when I buy into people, I’m very reluctant to sell if they are invested in me. I don’t check stats all the time (although I do try to check once every few days), so your downside number 5 of a high ROI strategy doesn’t apply to me. And when I do check stats, I will generally only sell if their ROI becomes precipitously low. So, even if someone’s ROI goes below 1, then as long as they aren’t under .4 or so, then I’ll stick in with them.
So, for me, it’s tough to get me to buy all the way in, but if I am bought in, then I will generally stay in if they will stay in with me.
I think this can lead to a security effect, where people are 200 and 200, (or for me, since I can’t go above 200, maybe it’s 200 for 600).
Oct 25, 2011 @ 20:38:26
Thanks Andrew. It sounds like your strategy is somewhat of a hybrid between a high ROI and reciprocal buying strategy.
Oct 25, 2011 @ 20:21:55
P.S., my data is totally unscientific, but I would say my share price increase has been very gradual…and my social activity has been pretty *constant* for the past couple of weeks, and my ROI has stayed pretty constant around 1.19-1.2 the past couple of weeks. So, I don’t see that I have to increase my social activity as my price goes up, because my price going up is in a rate consistent with with my increase in shareholders, and the new shareholders increase my div/share.
I think the big unknown is the relationship between share price-to-number of shares outstanding (or maybe it’s share price-to-number of shareholders?) and dividend-per-share to number of shares outstanding.
What causes share price to increase faster than dividends-per-share, given that dividends-per-share increases with number of shares outstanding?
Oct 25, 2011 @ 20:45:34
I think it’s pretty well established that there is a direct, linear correlation between shares outstanding and share price. Your share price goes up a small but fixed amount for every share purchased.
Intuitively, you would think that you produce a certain dividend and then that dividend is divided among your shareholders based on the number of shares each owns, and in that case the more shares that are purchased the more shares your dividend is divided by hence driving down the dividend per share. But I have heard it said repeatedly by many players that that is not the case. EAv calculates your dividend per share based on EAv & social media activity. It has nothing to do with the number of shares outstanding. I don’t have any quotes, links, or experiments to show you that prove that, but I’ve been told that numerous times by other players.
Oct 25, 2011 @ 20:52:56
Oh, gosh, Paul, running out of places to reply…
Here’s what I’ve heard. You know the feature to limit automatic share increases? I heard that that was eliminated because EAv changed the way that dividends are calculated so that the feature was meaningless. The way I had it explained was this.
It used to be that social activity would determine total earnings, and then total earnings would be divided by number of shares to equal dividend per share. That way, more shares would mean your dividend per share is diluted. So, it would be very advantageous to limit how many shareholders you can get.
The way people have explained the current system, is that the equation is somewhat reversed. Rather than starting with total earnings and dividing by number of shares, your social activity determines earnings, but there is a mysterious “dividend multiplier,” so your total dividend pool which is divided by shares outstanding to get dividend per share doesn’t necessarily equate to your earnings for the day via social activity. That way, it’s meaningless to limit how many shares outstanding you have, because your dividends scale with number of shares outstanding. (In this way, number of shares outstanding doesn’t matter because dividends increase with number of shares outstanding.)
I’ll probably go email/tweet EAv people to try to find something conclusive. I probably won’t get a response, but asking can’t hurt, can it?
Oct 25, 2011 @ 21:08:06
Andrew, that’s what I’ve heard too. FWIW, I’m 0 for 4 in getting replies to messages sent to EAv support, but I sent an EAv message to (e)DUPS and he replied within 24 hours. 🙂
Oct 25, 2011 @ 16:09:26
Sorry, I forgot go subscribe with my last comment.
Oct 25, 2011 @ 16:35:50
Fantastic post Paul and I really agree with lots of it. As David Sanger said, your 2 kinds of categories could also be named as the “investments” and the “investors”… We are all investments when we start and as you said, we either go into a spiral of increasing media and activity to keep good ROI, Yield etc… if not our shares start looking less “sexy”…
I have been on EAv for 4 months, with first 2 months no buy-back strategy, and now buying back ALL my shareholders…
I don’t advertise it, so I can keep up lol and this is what I would add to your five points:
6. Do we connect better holding 600 shares of our stocks OR by increasing our portfolio size?
As I am here to socialize and connect, it makes sense for me to buy back from everyone…
So FYI I already spent 1 Million for 3 pies + 1 portfolio size increase…
7. Buying back makes people happy… People like when you buy their shares… Are people who just bought your shares deserving less credit because their own dividends are lower ? certainly not, it’s not all about dividends is-it? You feel good buying back your share holders as you know they appreciate your investment…
8. Buying back does not prevent you from making profit. I still have eaves to invest into other shares. The excess gain I make from those will cover by far any loss I might have (temporary or not) by some buy-backs.
9. Buying back does not affect your own dividends produced by your own shares… false rumour that some maintain to justify their investments…
10. Buying back should secure us much better (from sells) in the unlikely event that our share value would face a temporary drop… I expect our shareholders to be much more supportive and to keep focus on the long term and relationship…
Many thanks again 😀
Oct 25, 2011 @ 17:01:25
Dominique, all great points there. Do you monitor your portfolio and sell share of people when it appears they’ve left the game? What’s your rule of thumb on that?
Oct 26, 2011 @ 16:45:44
Yes of course, even before they left the game IF they don’t hold my shares… I sell as soon as shares drop IF non share holders….
Oct 25, 2011 @ 16:40:12
I started with the high ROI and by new people strategy as my main focus but was still doing reciprocal investing. It didn’t take me long to realize the flaw in my strategy. I was investing in people with very little engagement. I changed things up soon after. I no longer chase ‘ROI’. My strategy now is reciprocal investment (That is more in line with my goal of making contacts and building relationships) an Looking at the activity of the person I’m thinking of investing in.
In the long run the active person with the smaller div is a more dependable investment than the skyrocketing divs which we have seen lately with the high profile players leaving the game. A high profile player may bring me hundreds of eaves in a day, but when they leave that’s hundreds of eaves in a day down the sewer pipes. The smaller div player leaves and my daily income of eaves does not plummet and is much easier to recoup in new investments.
Oct 25, 2011 @ 17:15:15
Some good observations and insight there. Thanks!
Oct 25, 2011 @ 17:53:20
I try to buy back all of my shareholders over time (I don’t know how to be evenly reciprocal at 10% the math just doesn’t work for me until I have tons of dividends coming in. I used to buy back the more of the higher roi’s first thinking I’d have more dividends to reinvest all the way down, but found it was VERY slow, especially with the new algorithms that seem to be portfolio-wide. I felt I wasn’t buying evenly enough, and now I’m trying to buy all my active shareholders as evenly as possible.
Even folks with a zillion eaves I think still like to be invested in (I used to think they would be annoyed with my small purchases, and maybe some are, but maybe not), I’ll just keep doing it until I max. My max is still 200, I will get that first upgrade when I’m closer to my goal.
Oct 25, 2011 @ 20:49:10
That is part of the challenge to a reciprocal buying strategy – I don’t know that anyone except maybe the wealthiest players could actually reciprocate every shareholder share for share. So, part of a reciprocal buying strategy is figuring out how to prioritize shareholders in the reciprocating process and how to keep track the reciprocating.
Oct 26, 2011 @ 16:57:20
I would say to prioritize and match all up to 200 max before next pie… then next pie and match up to 250 those who need to be etc… IF you rush for your 600 pie, we are talking about 1.5 Million eaves that you (lost in pies) miss for buy-backs… that’s a lot…
Oct 26, 2011 @ 17:55:47
Yeah, good point.
Oct 25, 2011 @ 22:19:01
Strategy 😉 ye gads – not sure I have one – I try to buy back at least a bit in people who buy my shares – I can’t always reciprocate the number that’s for sure.
I’m more interested personally in connecting and holding shares of people who are actively engaged in Empire Avenue above all – so, are they on EAv at least a couple of times a week, do they participate in communities and use shareholder email – that sort of thing.
Oct 27, 2011 @ 05:42:40
Players of the game are so different and it is hard to categorise them. I buy back and only seek to dump people who don’t buy back in me if their share price is tanking. I have much more patience with people who have invested in me. I don’t expect people to buy back in me, but it is nice. Just know that they are more likely to be dumped if their shares are not performing. Exceptions include friends in real and virtual life.
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Jan 03, 2012 @ 22:20:26
Feb 18, 2012 @ 06:05:05
Hi Paul,
This is a very good post an I will certainly be learning from it and looking into joining some reciprocal investor lists to see how they work.
I joined Empire Avenue to expand my Social Media network and not for high ROI. For me its about connecting with like minded people and not how much they own or what their share price is. So I have been following a reciprocal buying policy since I started in that I will always match peoples buys and will keep the shares even if there price drops as long as they keep my shares.
I have invested in people and they have not reciprocated so after a while I sell so I can free up the eaves to invest in others who reciprocate.
I do prefer to start with small investments and then go up in steps to my current 200 share limit as I believe this starts a dialogue especially when you do shoutouts for each of the buys. Also tweeting about the investments also establishes an element of trust and builds the relationship.
Regards
Colin
http://www.empireavenue.com/SYDESJOKES
http://twitter.com/SydesJokes
Feb 18, 2012 @ 08:09:51
Hi Colin, thanks for joining the list and sharing your strategy. Sounds like a good plan.