DAVID KESTENBAUM, HOST:

This is somewhere in Utah - I'm not going to say where - outside a small town at the end of a dirt road at one of those storage facilities - you know, the places where people stick stuff that they don't have room for in their basement, where they occasionally put something really valuable.

BOB PETERSON: OK, yeah.

KESTENBAUM: What kind of security do you have there?

PETERSON: I have a padlock...

(LAUGHTER)

PETERSON: ...On the door. That is it (laughter).

KESTENBAUM: This is Bob Peterson. Bob claims to have found that thing that people have sought for thousands of years - an investment guaranteed to double in value, free money. He keeps it in the storage locker here.

PETERSON: Plug in the lights so I can see (laughter).

KESTENBAUM: There's the usual stuff - boxes of family photos, couple of bikes, car seats, actually an old car with a flat tire. And then in the middle of all this stuff, there it is, his secret, his treasure. When I tell you what it is, it's going to seem very ordinary.

PETERSON: You got marketing, college accounting, earth science...

KESTENBAUM: Books, thousands of fat used textbooks.

PETERSON: ...American history, nursing...

KESTENBAUM: The boringness of this, that is Bob's edge. He's figured out something about the history of the Vietnam War fourth edition and mathematics with applications that apparently no one else knows.

PETERSON: ...Living with art, the art of public speaking.

KESTENBAUM: Hello and welcome to PLANET MONEY. I'm David Kestenbaum. There's a term in economics for this kind of thing, arbitrage, basically means free money, guaranteed way to buy low and sell high. Arbitrageurs are basically impossible to find. But today on the show, two guys who think they did.

(SOUNDBITE OF SONG, "TEACH ME TONIGHT")

STEVIE WONDER FT THE FOUR TOPS: (Singing) Come on, teach me tonight. Starting with the A, B, C of it right down to the X, Y, Z of it.

KESTENBAUM: A little while ago, we did a show about college textbooks. And afterward, we got an email from Bob's brother-in-law, actually, saying, great show, but by the way, there is this one other little odd corner of the textbook world you might be interested in. And, of course, we were.

I called up Bob, and he told me he'd discovered this textbook thing by accident. He was running a small business out of his house selling T-shirts and flip-flops and stuffed animals on Amazon and sometimes selling used books. He'd pick them up at a local thrift store and try to sell them online.

PETERSON: Quickly you learned that fiction books are worthless. After they come out, within six, seven months, everybody's got a copy of it and no one wants to buy another copy of it.

KESTENBAUM: But with textbooks he noticed something weird. Their prices jumped around a lot. The first time he noticed this was with an economics textbook. He'd put it up on Amazon, offering to sell it for 15 bucks, and someone bought it. But then, as he was packaging the book to ship it off, he looked online again, and he found that the going price for the book had jumped up to 25 bucks.

PETERSON: Wow. All of a sudden, this book went up in value.

KESTENBAUM: Did you wonder why that was happening?

PETERSON: No. I didn't even give it much thought at the time, just wishing that I would have sold it for more money.

KESTENBAUM: That was an extra $10 he could've made. So he started tracking a few books, and he saw this one book go from a few dollars up to 60. The classic example of arbitrage is that you find one thing that is selling for two different prices. Say Toyota stock is trading for $100 a share on the New York Stock Exchange, but you see that on the Japanese Exchange, it's selling for more - $102. You could buy it on the first exchange, sell it on the second, done. A couple of mouse clicks earns you 2 bucks - free money.

Bob thought he was seeing something similar in textbook prices, only the prices were mismatched over time. He even had a theory for what was going on. He guessed that the prices were going up and down with the college calendar. When a semester ended, say it's summer, that's when the books should be cheap. Students would be eager to unload their heavy books, and there'd be no one particularly psyched to buy them. No one is looking for a nice textbook in July to curl up with on the beach. But when the next school year started, as classes began, everyone would be like, I need a book, I need a book, and prices should go up again.

If Bob was right and this was really happening reliably with lots of books, he could make money - buy low, sell high. Last year, he tried it out with one book in particular, "Campbell Biology," a huge, thousand-page thing. He waited for the price to drop, and he bought eight of them at around 8 bucks each. Then he posted them on Amazon for $39.99. He waited and he sold them all.

PETERSON: Oh, it felt great. I'm, like, OK, there's something here. And this is when I approached Kenny - oh, he's my brother-in-law.

KESTENBAUM: Kenny Jacobson, here he is.

KENNY JACOBSON: If I remember correctly, it was my sister. We were on the phone, she was like, Bob has some idea. It has to do with textbooks and programming and a database. I don't know, you'll want to talk to him. But we're coming down for Easter, so you can talk to him then.

KESTENBAUM: They got together at Kenny's parents' house, and Bob explained his secret, what he'd found. And he said he wanted to scale it up. Kenny was a programmer. Bob figured he could write some code to watch the prices and analyze them, help them figure out what books to buy when. Kenny thought about it.

JACOBSON: During that time, I was kind of obsessed with the stock market. I was reading all these books. And I'm a programmer by trade, and so I think every programmer goes through a phase where he or she thinks they can beat the market, you know, because they can, well, you know, just program their way through it. And I learned by experience that you can't. I wasn't going to beat the market.

KESTENBAUM: With the stock market, there were too many people, too many computer trading algorithms all looking for any little pattern. That's the thing about arbitrage, everyone is looking for these ways to make free money. And as soon as someone finds some little mispricing, it goes away. The act of trying to get the free money pushes the prices back into alignment. The stock market seemed unbeatable. But maybe there was a way to beat the textbook market.

Now, if you're looking at stocks or bonds or something, there's a ton of data. It's been collected for decades. You can make any chart or graph you want. For textbooks, there was nothing like this. They needed to figure it all out. Kenny wrote code that would go to the Amazon website and automatically check what price thousands of different textbooks were selling for.

It did this every night. What's "Campbell Biology" selling for now. Then again the next day, what's it selling for now? And the next day. They let this run for months, waited patiently, the computer sucking up all this data. And then they started to make charts to see if they could find that semester pattern.

JACOBSON: Once we had a year's worth of data, then you could really see the valleys and the peaks.

KESTENBAUM: Is it a really clear pattern?

PETERSON: Not everyone has a clear pattern, but some of them are just amazing.

KESTENBAUM: What one looks really amazing?

PETERSON: Well, the gold standard for this textbook season is "Adult Development And Aging."

PETERSON: Do you have that chart, Kenny?

JACOBSON: Let me find it. What was it called?

PETERSON: Do you want its ISBN number? 0073128546.

JACOBSON: Oh, yeah, we've got six of those in inventory. Oh, my gosh, OK, that is a good chart (laughter).

KESTENBAUM: In the summer, the book hits a low of $16.92. But then...

JACOBSON: Right around January 1, it starts shooting up. And at January 29, it's in the $250 range.

KESTENBAUM: From 16 bucks to 250 - the chance to make over $200 on a single book. The pattern was there for lots of books - arbitrage - free money. It's as if you'd found a stock that went up and down at very regular times so that you would know exactly when you could buy it and then you would know exactly when to sell it, and you would guaranteed make money.

PETERSON: Yeah, that's what got us excited.

PETERSON: They decided to go all-in - buy $10,000 worth of used textbooks, which when you're buying books for 8 bucks or 4 bucks each, it's a lot of books.

You're like a hedge fund for textbooks.

PETERSON: That's a good way of looking at it, yes.

KESTENBAUM: A very small hedge fund.

JACOBSON: Yes.

PETERSON: A very small one, yeah.

KESTENBAUM: One basic operating principle of hedge funds is that if you've discovered a secret way to make money, you don't email reporters about it and then explain your whole strategy in detail. But they figure they've got a head start, a couple years' data that no one else has. And when they describe the day-to-day of running a textbook arbitrage hedge fund, it feels a lot less like free money.

Bob sometimes gets 40 boxes in the mail. He has to open each of them, put the books in a car, take them to the storage locker, post them for sale on Amazon. When someone buys a book, he's got to go back to the storage locker, get the book, package it up, ship it off. As you might imagine, the folks at the post office know him pretty well.

JACOBSON: They let him go in through the back door. I don't know if we should say that. I don't want anybody to get in trouble.

(LAUGHTER)

JACOBSON: It's like he's another employee there.

KESTENBAUM: As investment funds go, this one's worked out pretty well so far.

JACOBSON: For every dollar we put in, we get $2 back. Does that sound right, Bob?

PETERSON: Yeah. Yeah, I'd say that's about right. That's pretty conservative but probably accurate.

KESTENBAUM: You doubled your money in a semester.

PETERSON: Yeah.

KESTENBAUM: I looked up the top-performing hedge funds, and their average returns are something like 30 percent, meaning if you invested $1, you got back a $1.30 at the end of the year. Kenny and Bob's textbook strategy did much better than that. They doubled their money in half a year. They outperformed the best hedge funds. And, OK, they're only looking at making $10,000. And when you factor in Bob's labor, all that box opening, it looks less good.

But still, in a certain light, it's impressive, though not everyone is impressed. In fact, some people are kind of pissed off when they hear about what Bob and Kenny are doing.

JACOBSON: I have learned I have to be careful when I'm talking about it because I was at my mechanics one time and we had just started to make money off this. And I was telling him a little bit about it. And there was another lady sitting, you know, in the waiting room part and she overheard us, and she's like - she said something like, well, that's just immoral what you're doing. And I'm like, what? She's like, I have a daughter in college right now and I can't believe that you would - and I'm like, oh, my goodness I have to be careful because, you know, she interpreted it - she wanted her daughter to be able to buy the textbooks at the cheapest price, I suppose. And here we are buying them cheap and selling them back higher to her daughter is kind of how she saw it.

KESTENBAUM: Well, wasn't that right.

JACOBSON: Yeah, except...

(LAUGHTER)

JACOBSON: Well...

KESTENBAUM: I've been thinking about where the money these guys are making is coming from. There are a couple of non-arbitrage-y ways to think about it. You could argue that Bob and Kenny are making money here because they're providing a service. They're providing something of value - taking a book off someone's hands when no one else wants it. Or you could argue they're making money as a reward for taking a risk that no one else wants to. It's possible they'll get stuck with a bunch of these books. Bob says there's a copy of "Nursing Care Plans - 7th Edition" he would love to get rid of. But I think the easiest explanation is just arbitrage. They've figured out some little piece of information that other people don't know. They found a fishing hole that people had either passed over just didn't know about.

The thing about free money opportunities though is that they don't last. This is why arbitrage is so rare. If other people decide to get in on this textbook game - imagine a giant used bookstore with plenty of money and storage space - if they want in, there will be a bidding war for those textbooks in the offseason. You won't be able to get them for $4 anymore. The price gap will close, and everyone will be better off. The students selling books will get more money for them. The people buying them when classes start will get them a little cheaper than they do now. Everyone will win except Kenny and Bob. They will be out of business.

It's possible someone has actually already discovered the same secret. Bob and Kenny have been getting a suspicious number of orders from someone named Mary Campbell.

JACOBSON: So Mary Campbell is our biggest book buyer.

PETERSON: Yeah.

JACOBSON: Yeah.

PETERSON: They know Mary Campbell is not some really voracious reader or ambitious student because she buys multiple copies of the same textbook. Her address is a P.O. Box in Kentucky. Maybe this Mary Campbell has figured out a better system, a better way to make money off their books, a way to out arbitrage the arbitrageurs. Or maybe there's something even bigger going on.

JACOBSON: It's possible there's no real person named Mary Campbell. It might just be - we don't know. Like, that's what...

PETERSON: That's the mystery behind it.

KESTENBAUM: It could be Mary Campbell is a computer program buying and selling according to some algorithm. Bob and Kenny say the word in the used book world is that Mary Campbell is a name used by some big company that buys textbooks and rents them out to students. We sent a reporter to that post office in Kentucky. She asked the mail clerk about that P.O. box. She just mentioned the number, and the guy shouted to his colleague, hey, someone wants to know about Mary Campbell. They couldn't tell us much. They did say there was no person named Mary Campbell who came to get the mail.

(SOUNDBITE OF SONG, "TEACH ME TONIGHT")

STEVIE WONDER FT THE FOUR TOPS: (Singing) Did you say I've got a lot to learn, well, don't think I'm trying not to learn.

KESTENBAUM: Special thanks today to Tana Weingartner at WVXU in Cincinnati. She's the reporter who went to the post office for us. If you know who Mary Campbell is, please let us know. You can send us email - planetmoney@npr.org. Our show today was produced by Phia Bennin. I'm David Kestenbaum. Thanks for listening.

(SOUNDBITE OF SONG, "TEACH ME TONIGHT")

STEVIE WONDER FT THE FOUR TOPS: (Singing) Help me solve the mystery of it. Oh, I want to be taught tonight. Because the sky's a blackboard high above me, if a shooting star goes by, I'll use that star to write I love a thousand times across the sky.

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