Stockpiling

So let’s say one of your favorite items is usually trading between 25 and 32g.  You used to buy it around 25 and resell it around 30 making roughly 20%.  Now suppose it dropped down in price to 20.  What do you do? You buy it all of course.  You know it’s going to go up to 25-30 in a few days and you’ll make a nice profit.  You relist some of it for 27, but nobody buys it.  Undercutters come in and it is back down to 20.  What do you do now?  Do you keep buying it at 20? A lot of people will tell you of course you should buy more. Well, I don’t think so.  It might be a great deal or it might be a bad investment.  How do you know which one it is?  I use the following guidelines to help me make a decision:

• Do I understand why the item dropped in price? This one is easy.  If I can tell why the price dropped, I can figure out if/when it will go back up.  The bad part is that it is never easy to figure out the right answer to this question.
• How much of it do I already have and how long will it take me to sell it?  If the demand for this item is about 500 per week and I have 50, I’m sitting pretty good and if I think the item will rebound, I’ll keep buying it.  If on the other hand I have 5000, it would be a good idea to stop.  I don’t want to hold up that much inventory.  I try to have all my gold generate me income and try to turn it around in under a week if I can (meaning I aim to resell what I’ve bought within a week).  I know I can easily get around 20% return on my investment (and usually more) so for me to hold anything for longer than 2 weeks, I would require at least double the usual return.
• What percentage of my total wealth is invested in it? Remember when you were a kid and your grandparents told you not to put all your eggs in one basket? Well it applies here as well.  You don’t want to have a large portion of your gold invested in a singe item.  It might be hard to do when you are just starting and only have a few gold, but once you are above 10-20k, you should follow this rule.  The percentage you should aim for is what makes you comfortable.  I never go above 10% if I don’t understand why the price dropped and 15% if I know the price will go up shortly.  Why only 15% if I know it should go back up? This is what makes me comfortable – anything more and I’m not sure I’m willing to take the risk and lose my hard-earned capital.
• Do I have a plan B if the drop in price is permanent? This is also a very important question.  If the item is something like Frost Lotus, I can either resell it or turn it into flasks.  So I have a plan B.  If it’s something that I have no use for (like something that is only used to level a profession), I will be very reluctant to stock up on it because I don’t want to end up with a stockpile of junk that nobody wants to buy at the prices that would be profitable for me.

I know some people would disagree with me on this.  If you are one of them, feel free to leave a comment.