How I Paid for my MBA with Pennies
Journey from broke to six figures
The year was 2008 and we were in the depths of the Great Recession. I had left my job as a Supply Chain Manager for a Xerox subsidiary in Denver, Colorado and moved back in with my parents in Kansas City. It was the fourth (or fifth?) time I had moved back home.
I was slated to fly to England in a couple months to pursue my MBA, but I could no longer afford the flight. My car had been repossessed a few months earlier as I couldn't cover the $150 a month payment.
After selling most of my posessions, I had $500 to my name. I emailed Manchester Business School and told them I wouldn't be coming. I asked them to hold my place for a year. Luckily, they agreed. Relieved that I had bought myself 12 months, there I was in the basement of my parents house, unemployed, broke, and bored.
I sat on the couch one evening when a news report came on.
The news segment ended with a comment that caught my attention. Something to the effect of, "...and they last changed the composition of the penny in 1982. A pre-1982 penny now contains over two cents worth of copper..."
Wait a second, you're telling me that the everyday circulating pre-1982 penny is intrinsically worth twice as much as it's monetary value? I had to explore this further.
The next morning I went to my local bank and bought $100 worth of pennies. The pennies came in $25 boxes. 50 pennies per roll, 50 rolls per box. I took the 200 rolls of pennies and started cracking them open on the kitchen table.
Several hours of sorting resulted in three piles: pennies newer than 1982 (mostly zinc), pennies minted between 1959 - 1982 (95% copper), and pre-1959. The pre-1959 "Wheat" pennies had numismatic value and could be sold to collectors.
The initial distribution looked like this:
The initial $100 broke down into roughly $70 in zinc coin, $29 in 95% copper coin and $1 in collectable "wheat" pennies. Given 155 pre-1982 pennies equals a pound of copper, at $3 a pound for copper I calculated the metal value of the coins to be worth $58. Add in an average price of five cents per "wheat" penny and I'm looking at a total return of $34 on a $100 investment, or a 34% risk-free ROI. Business thesis sorted, I was off to valitdate what I viewed as the critial operational variables:
- How easily could I turn the leftover zinc pennies to cash?
- How easy is it to sell the collectable wheat pennies for a premium?
- Is it possible to sell the copper pennies as scrap copper to a smelter?
Easiest money ever!
The next day I took the $70 in zinc pennies back to the bank and received $70 in cash. Easy enough. Next stop was a local coin dealer where I sold the wheat pennies for 5 cents a piece. So far so good. Next stop was the local smelter. That interaction went something like this:
"Hi, I'd like to sell this 19 lb bag of scrap copper."
"Son, we can't take these. It's illegal to melt pennies."
"What? Why? People melt pre-1964 quarters and dimes all the time for the silver value. Why can't I melt pennies for copper?"
In one word, China.
Front run by the Government
On December 14th, 2006 the United States Mint banned the melting of pennies and nickels as they feared enterprising individuals would look to melt the coins and ship the metal to China. China was in the midst of an infrastructure boom and had an insatiable appetite for base metals. The Mint had calculated that melting 1% of pennies and nickels in circulation would result in a coin shortage, costing taxpayers roughly $43 million to rectify. They had no choice but to lock it down.
Damn. They beat me to it.
Bag of copper pennies in hand, I went home and jumped online to verify the ban for myself. Perhaps there was a way around it? There wasn't.
There's an online community for everything
As I was searching for a way around the melting ban, I happened upon the Realcent forums. In 2008, social media was still in its infancy. Blogger and MySpace were the hotness of the day. No Twitter. No Reddit. Forums are where communities lived and thrived online.
Realcent was a community of penny hoarders. A penny hoarder is similar to a gold bug in that they live and die by Gresham's Law. Their objective is to accumulate monetary assets (coins) with intrinsic value (metal value > value as legal coinage) to protect against the destruction of fiat currency via inflation. Gold bugs typically invest in gold coins, like the American Eagle or British Britannia. The penny hoarder's fiat hedge of choice? The pre-1982 US penny.
The penny hoarder community was hard core. Ryedale was the penny miner. He invented a machine that mined for copper pennies. Pour wild circulating pennies in the top, extract the copper pennies out the bottom. It was genius.
Another guy, Copper Catcher, was the penny whale. He offered spot copper rates for pre-sorted bags of pre-1982 pennies. He aggressively bought up all copper coins offered for sale. A true OG HODLer.
My eyes lit up.
I'm all in
The next day I drove to every bank in town. I was on a mission to turn my life savings to pennies. After my fourth or fifth bank, I was flush with coin and returned home to start sorting.
Fun Fact: $474 in pennies weighs about 284 lbs. The Penny Workout is a thing.
After a couple days of manual sorting on the kitchen table, the tally was in:
- $329 in zinc pennies
- $141 in copper pennies
- $4 in wheat pennies
Now sitting on 110 lbs of copper coin, it was time to make a sale.
The moment of truth
I jumped on the Realcent forum, created the username Pennybullion, and put my 110 lbs of copper pennies on offer at the spot copper price of $3.00 / lb or $330 for the lot, including shipping. As it was my first forum post, replies were slow. I needed to assert my bona fides with the penny faithful. I started posting about my process: how I acquired the pennies, how I sorted them by hand, how they were bagged, how I intended to ship the coins. Finally, I started to get some engagement. The questions poured in:
How clean is the copper?
Are your coins shiny?
Have you searched the coins for "wheaties"?
Sheesh, these guys are tough! It took a couple days to convince the Penny Bros that my wares were legit. Then, there it was. My first sale!
How the hell do I ship $110 of pennies?
That was the question that kept rolling around in my head. The payment cleared PayPal days ago, and the clock was ticking. I needed to find a solution, fast. I figured the best way to secure the coin was to roll them up and place them in boxes. This is how they come when you order coin from the bank, so if it's good enough for the bank, it should work.
As it turns out, the Priority Mail Medium Flat Rate Box fit three boxes of pennies almost perfectly. Parcels in hand, I lugged the pennies to the post office and off they went.
And so it began. From my initial $504 investment I had returned $121, an after-cost ROI of 24%. Thesis offically validated.
How many more times could I do this?
Optimizing for cycle time
The penny business is a game of turnover. Circulating coin produces copper coin, which when sold produces cash used to buy more circulating coin. The lower the cycle time, the greater the compound returns.
Penny sorting was the primary bottleneck. I needed a Ryedale penny sorter. At $250, they weren't cheap, but at 300 coins per minute I would reduce my sorting time by 5x. Problem was, $250 was almost half my net worth. I needed to raise money.
Everyone I spoke to thought I was insane. I didn't care. The risk was minimal. The pennies I could always sell back at face value. The only risk was the cost of the equipment. After much convincing, I secured $1000 in loans from friends and family, and I was officially in the penny business!
Penny sorter in hand, the next bottleneck was sourcing coin. It could take almost an entire day to turn cash to coin if randomly driving around from bank to bank. Coin supply was unpredictable, some days a given bank would have a lot, some days they'd have nothing. I needed a way to optimize my purchasing funnel.
It struck me that retail businesses have lots of coin, and they have to pay someone to securely pick them up for deposit on a daily or weekly basis. Why not target them? Grocery stores, gas stations, car washes, laundry mats. They should all sell their coin to me! I get a steady supply of coin and they save on the coin processing costs! It's a win-win! I made up fliers and distributed them to every retail store manager within a 50 mile radius.
"Excess Pennies? Call Matt. Will process for free, pays cash."
Amazingly this worked, and for some reason the copper content was higher when sourced from retail. With a constant supply of coin, I was able to plan out my routes a day or two in advance, cutting my sourcing time by 75%.
Next bottleneck was the disposal of the zinc coin. As 65-70% of all the coin I purchased were zincs, I needed a quick and reliable way to turn large quantities of these pennies to cash.
By this point, my normal bank had made it clear I was no longer welcome to deposit coins. Looking back now, I can't blame them. I held $100 in deposits with them. They lost money on me every time I showed up with a bucket of pennies.
Setting up accounts at multiple banks wouldn't solve the problem either. It takes time to go from bank to bank, and eventually they'd all cut me off for the same reason. With zinc pennies piling up in my garage, I needed to find a way out of this mess. Desperate for a solution, I came up with a crazy idea.
The thinking went like this. Banks are for profit institutions; however, credit unions are non profit. They exist to serve their members. So if I can find a credit union away from the city (fewer members, hungry for deposits) that isn't busy during the day (lines of members in the lobby while the penny guy counts coins for an hour = unhappy members = kill penny guy), and make them feel good about accepting the coin (everyone loves to contribute to a good cause), then I'd have a chance. I knew the ideal credit union to target, and after much trial and error I came up with an air tight narrative.
Having picked my mark and prepared my story, I drove to a rural credit union 20 minutes from my house and walked in with two buckets of pennies.
"Hi, I have a rather unusual request. My grandfather just passed, and he was a bit of a penny hoarder. He'd been saving pennies for the last 50 years. In his will, he'd left them to me to pay for my education. I'm due to go to school in 11 months and I could really use the money. Problem is, his house is full of pennies. See these two buckets? There's probably 200 just like them. If I opened an account, could I start bringing in a few buckets a couple times a week? I promise I'll only come during your most off-peak hours."
They bought it.
Relieved that I now had a reliable way to turn the zinc coin to cash, I turned my attention to sales. As I exhausted the demand on the Realcent forums, copper coin inventory started to pile up. As an experiment, I setup an eBay account under the Pennybullion handle and started running auctions.
Much to my surprise, with every auction I was making a 2 to 2.5x return on each bag of copper coin. Before long I was selling everything I could get my hands on.
Going direct--to the Federal Reserve
After a couple months of operation, I had turned over enough coin to accrue $10,000 in working capital. However, my local retail runs were only producing about $1000 in coin per week. I needed to level up.
I called my bank (the one with $100 in the account, not the credit union where I was depositing buckets of pennies), and asked hypothetically, if I wanted to purchase $10,000 worth of pennies, how would I go about it? Their answer surprised me.
"We can't source that amount of coin. It exceeds the weight limit on our delivery trucks. For that kind of volume, you'd need to order directly from the Federal Reserve."
"How do I do that?" I asked.
"Well, if you deposit $10,000 in your account we can arrange the order, but you'd have to sort out the transport. We don't want to pay for the armored car service."
"What if I picked it up directly?"
"Uhhh, not sure. Let me call them and get back to you."
An hour later, the bank called me back and confirmed my appointment in two days time to go pick up $10,000 in pennies at the Federal Reserve coin processing facility.
Doing some back of the envelope math, I calculated that $10,000 in pennies weighs approximately 3 tons. I started calling every truck rental company I could find and gave them my requirements. Luckily, Ryder was willing to rent me a 16 ft box truck which could (barely) handle the load. Game on.
Returning from the Federal Reserve freshly loaded down with coin, I started again. Sort, count, auction, box, ship, return.
In all honesty it was a monotonous job and a hell of a workout. The $10,000 in pennies yielded just over a ton of copper coin. Time to get serious.
Looking at the current rate of sales through the eBay store, I calculated it would take a month to sell an entire ton of copper pennies. Inventory turnover was now the bottleneck. I needed a way to sell in bulk.
I purchased the domain pennybullion.com and stood up the most basic e-commerce site on the internet. I figured the easiest way to sell a ton of copper pennies was to offer a ton of copper pennies for sale. Thus, the site contained a single product--the One Ton. One ton of copper coins shipped to your door for $7500. I setup google Adwords, set my budget at $100 for the month and went about my day.
A couple days later as I was checking my email, I found I had PayPal confirmation for $7500. Holy Shit! Someone bought it!
Shipping a ton of pennies
My initial excitement instantaneously turned to horror as I realized that I now had to ship a literal ton of copper coin. Shipping a box of pennies via USPS worked well, but shipping that kind of volume via USPS would be back breaking and significantly eat into my margins. There had to be a better way.
That night, I went out for beers with a couple friends. "How's the penny business?" they would always ask, laughing. "I just sold a literal ton of pennies for $7500 today. That's almost $3000 in profit." They choked on their beer.
As I was explaining the logistical challenges associated with shipping a literal ton of pennies, my friend (a FedEx employee) jokingly offered a suggestion.
"You know, as as an employee of FedEx, you're entitled to discounts on shipping...discounts up to 40%. If you came to work for me this would all be easy."
Holy shit! Shipping was my single largest expense item. I'd gladly load trucks for a couple hours a day to cut my costs by 40%! It was a no brainer. So the next day I did what any rational person in the penny business would do--I went and applied for a job at FedEx.
I started working the night shift loading trucks at the FedEx distribution hub in Olathe, Kansas. I worked from 8p - 11p, five days a week. I selected the night shift as it was off hours from the daytime penny business. FedEx was a great place to work. It paid well, the people were nice and the benefits were great. Factoring in the shipping discount, I figured I was the highest paid hourly employee in the company.
Establishing a wholesale supply chain
After the launch of pennybullion.com, I quickly gained a cult following in the penny hoarder community. It became a badge of honor to purchase the "One Ton" for your personal hoard. Soon, I had all kinds of crazy inbound requests. Gold bugs looking to diversify their metal holdings into copper coin were literally shipping me gold bars as payment for several tons of pennies. Gold and silver dealers across the country wanted in on the craze. I negotiated wholesale supply contracts on a forward basis, meaning I had pre-sold every copper penny I could possibly source.
It. Was. Nuts.
Again facing a bottleneck sourcing coin, I engaged the penny hoarder community and started a wholesale buying operation. I purchased any quantity of pre-sorted copper pennies at a 20% discount to spot, no questions asked. The hoarders loved it. They'd simply mine 50% more than they would for personal consumption and sell the excess to Pennybullion to finance their hobby. Another Win-Win.
As my US distribution grew, I started getting calls from coin processing companies in Canada looking to increase their bottom line. As one guy explained to me over the phone, the beauty of the Canadian penny is that it's 98% copper (vs 95% for the US coin), and there's no export ban. The Canadian boys wanted in on the action, and I was all too happy to oblige.
Pennybullion.com now had its second product--the Canadian Ton.
Off to school
Fast forward 11 months, it was time to jump off this crazy train and board a plane bound for England to purse my MBA. Up to that point, Pennybullion's growth had been consistent. Through a relentless focus on optimising cycle time and compounding returns, I had paid back the initial $1000 loan and made enough money to:
- Live for a year while running Pennybullion
- Pay for my MBA
- Live for 18 months in England
- Live for 3 months in Australia
All while enjoying myself plenty along the way.
12 hard months of focused, dedicated work led to the creation of:
- The investable copper penny industry
- The most recognisable brand in investable copper pennies
- An eBay marketplace for investable copper pennies
- Pennybullion.com, which created a liquid marketplace for investable copper pennies.
- A wholesale distribution network of copper penny suppliers
- A wholesale distribution network of copper penny retailers
...and a hell of a lot of laughs along the way. In July 2009 I sold Pennybullion.com to a coin processing company in Arkansas. As part of the terms of the deal, I provided consulting services for six months post acquisition while I attended school.
Looking back, I'm not sure it could be done again. It was one of those "right place, right time" type of moments with a tiny window for someone to capitalize on an opportunity. It was a crazy idea, but, to quote Elon Musk, "good ideas are always crazy until they're not."
So, you've made it to the end, what did you think? I genuinely want to know. Love it? Hate it? Follow me on twitter and share your thoughts!