This is ideal example of wealth preservation, above all common beliefs.
Suppose you are an astronomer, and you get to know that a massive meteorite will strike Earth, which would destroy half of our population. You know, that you cannot help the world, but right now you have 10 million dollar to help yourself. What do you think will be best and worst thing to buy with your money, assuming that you will live at the end of the massacre ?
Post your comments, and i will tell you, at the end of it what is the ideal thing to do.
Keep the format of your comment as,
Best : Food, Gold, Keep the rest of cash.
Worst : Equities, Realestate.
Monday, February 23, 2009
Sunday, February 22, 2009
Stupid Assumptions
Here are a lot of our common beliefs with reasons that they are wrong.
Wrong Assumption 1 : Price is about quality of the product.
Take this fundamental law, price is always about supply and demand and has nothing to do with the quality of a product. Price (Salary) of a man does not depends on his intelligence. Price of a product not on its quality.
In 1800-1900's, Elephants were used as a mode to travel. Then came the Car, it was a luxury, it had speed, it had the power, it carried a high price tag also. Today, in 2000's Elephant is expensive than a car. The elephant is slow, has less power, smells bad, does not have an air-conditioner in it, still it is more expensive than a car. This is just because there are more cars and less elephants. Rare coin, however ugly will have more value than a not-so-rare coin.
Always keep rare things with you, don't keep what is ample.
In 1900s, big landlords and farmers, were rich guys. Then came the period where industrialists were rich. Then rock-n-roll guys were in the hall-of-fame. Then again industrialists. Then the technology champs. Then the Oil Barron's. Then the Wall-Street guys. Then ...
Wrong Assumption 2 : Equities cannot rally without a rally in corporate bonds.
A wrong argument is, if the price of corporate bond is falling, it indicates debt-holders do not trust corporate, so equities cannot rally until the trust is back.
However, if there is high inflation, corporate bonds will continue to loose value, however equities will be rallying. The trust has nothing to do with it.
Wrong Assumption 3 : Price of an underlying asset has nothing to do with money supply.
Price is more about money supply rather than supply-demand of the asset itself. If governments increases money supply, the price of the asset has to rise.
Wrong Assumption 5 : I am safe to keep my money in a 8% FD/bond/ NSC certificates.
The inflation that our government reports is never close to reality. The inflation number reported is the inflation for labor class. The average inflation for the Indian middle class in last 5 years, was well above 15%. The average inflation for a Indian upper-middle class in last 5 years was above 20%. Price of everything doubled in last 5 years. Whether it was a pair of jeans, the rice-wheat you eat, shampoo, doctors fee, medicines, condoms, edible oil, a car, a bike. Take anything you wanted to buy from your money and look at the price change between 2003 and now. So effective if you invested in NSC certificates, you made a overall purchasing-power terms loss. This was because, money supply was increased, so everything increased in price, except for your bonds.
Wrong Assumption 4 : People always burn hands in equities, commodities but they are still in it.
Take any five year horizon, assets will outperform cash or bonds. Even if you take peak and trough points in a 10 year period, assets will outperform cash or bonds. Don't worry about the daily euphoria, about everyday price changes, about market crashes, in a longer time period it will always be better to be in well-diversified equities/commodities/realestate rather than cash or bonds.
People live with their wrong assumptions, until they realize they are severly wrong. I want you to think rationally, and change your wrong assumption before you go severly wrong.
Wrong Assumption 1 : Price is about quality of the product.
Take this fundamental law, price is always about supply and demand and has nothing to do with the quality of a product. Price (Salary) of a man does not depends on his intelligence. Price of a product not on its quality.
In 1800-1900's, Elephants were used as a mode to travel. Then came the Car, it was a luxury, it had speed, it had the power, it carried a high price tag also. Today, in 2000's Elephant is expensive than a car. The elephant is slow, has less power, smells bad, does not have an air-conditioner in it, still it is more expensive than a car. This is just because there are more cars and less elephants. Rare coin, however ugly will have more value than a not-so-rare coin.
Always keep rare things with you, don't keep what is ample.
In 1900s, big landlords and farmers, were rich guys. Then came the period where industrialists were rich. Then rock-n-roll guys were in the hall-of-fame. Then again industrialists. Then the technology champs. Then the Oil Barron's. Then the Wall-Street guys. Then ...
Wrong Assumption 2 : Equities cannot rally without a rally in corporate bonds.
A wrong argument is, if the price of corporate bond is falling, it indicates debt-holders do not trust corporate, so equities cannot rally until the trust is back.
However, if there is high inflation, corporate bonds will continue to loose value, however equities will be rallying. The trust has nothing to do with it.
Wrong Assumption 3 : Price of an underlying asset has nothing to do with money supply.
Price is more about money supply rather than supply-demand of the asset itself. If governments increases money supply, the price of the asset has to rise.
Wrong Assumption 5 : I am safe to keep my money in a 8% FD/bond/ NSC certificates.
The inflation that our government reports is never close to reality. The inflation number reported is the inflation for labor class. The average inflation for the Indian middle class in last 5 years, was well above 15%. The average inflation for a Indian upper-middle class in last 5 years was above 20%. Price of everything doubled in last 5 years. Whether it was a pair of jeans, the rice-wheat you eat, shampoo, doctors fee, medicines, condoms, edible oil, a car, a bike. Take anything you wanted to buy from your money and look at the price change between 2003 and now. So effective if you invested in NSC certificates, you made a overall purchasing-power terms loss. This was because, money supply was increased, so everything increased in price, except for your bonds.
Wrong Assumption 4 : People always burn hands in equities, commodities but they are still in it.
Take any five year horizon, assets will outperform cash or bonds. Even if you take peak and trough points in a 10 year period, assets will outperform cash or bonds. Don't worry about the daily euphoria, about everyday price changes, about market crashes, in a longer time period it will always be better to be in well-diversified equities/commodities/realestate rather than cash or bonds.
People live with their wrong assumptions, until they realize they are severly wrong. I want you to think rationally, and change your wrong assumption before you go severly wrong.
Monday, February 9, 2009
Brutal Markets
Disclaimer : All the data and facts are taken from random websites and might be wrong.
The worst economic crash in human history, is not the Great Depression. But, the crash of 1340. The crash after which Black Death followed. Here are some interpretations of what happened.
1200-1340 was like a golden age for man. The economic boom which existed during those times was big. Silk, Cotton clothing were discovered. Shipping industry boomed and trade around the world started. That was the time, when the principles of free trade and free markets flourished. The world got globalized, Silk Route became famous. Civilizations interacted. Trade flourished.
Venice was like the trading hub of those times, the equivalent of New York or London. Fortunes were made at Rialto in Venice, the Wall Street equivalent of history. Whole bullion trade was globalized from Venice.
Gold was the currency primarily in India and China. Silver was the currency in most of Europe.
The inherent behavior of currency is, since it is the sole thing to keep, it is always overvalued.
Although, taking positions against overvaluation of a currency is a stupid thing to do, but it is always overvalued. Since, Silver bought everything in Europe, it was overvalued in Europe.
Gold bought everything in India and China, gold was overvalued in those countries.
Venetians discovered this great trade, and brought gold to Europe and sent Silver to India.
Mongols also looted Gold from India and China, and sent it to Venice. Venice, changed the currency standards in some European dynasties from Silver to Gold.
This led to oversupply of Gold in Europe. This oversupply lead to loss in value of Gold in Europe. But, how do you define Gold lost value, since it was their currency. Gold loosing value means, everything else increased in price including all important food items. Prices continuously rose from 1290-1340 relative to Gold and Silver in all of Europe, India and China. High inflation period started, because Europeans took too much Gold in their system, without increasing the productive output. This looted wealth, did not created prosperity in Europe but caused high inflation.
People started dying from Hunger. Rodents obviously spread on dead bodies, leading to a plaque called Black Death. Horrifying Black Death spread all over, killing 33% of the European population.
This thirst for Gold, eventually led to destruction of whole Europe. Remember that Wealth should never be accumulated, it should be distributed. But Mongols, wanted the Gold from everywhere. If you accumulate, all the gold in the world, you will not end rich, because gold will loose its value.
The worst economic crash in human history, is not the Great Depression. But, the crash of 1340. The crash after which Black Death followed. Here are some interpretations of what happened.
1200-1340 was like a golden age for man. The economic boom which existed during those times was big. Silk, Cotton clothing were discovered. Shipping industry boomed and trade around the world started. That was the time, when the principles of free trade and free markets flourished. The world got globalized, Silk Route became famous. Civilizations interacted. Trade flourished.
Venice was like the trading hub of those times, the equivalent of New York or London. Fortunes were made at Rialto in Venice, the Wall Street equivalent of history. Whole bullion trade was globalized from Venice.
Gold was the currency primarily in India and China. Silver was the currency in most of Europe.
The inherent behavior of currency is, since it is the sole thing to keep, it is always overvalued.
Although, taking positions against overvaluation of a currency is a stupid thing to do, but it is always overvalued. Since, Silver bought everything in Europe, it was overvalued in Europe.
Gold bought everything in India and China, gold was overvalued in those countries.
Venetians discovered this great trade, and brought gold to Europe and sent Silver to India.
Mongols also looted Gold from India and China, and sent it to Venice. Venice, changed the currency standards in some European dynasties from Silver to Gold.
This led to oversupply of Gold in Europe. This oversupply lead to loss in value of Gold in Europe. But, how do you define Gold lost value, since it was their currency. Gold loosing value means, everything else increased in price including all important food items. Prices continuously rose from 1290-1340 relative to Gold and Silver in all of Europe, India and China. High inflation period started, because Europeans took too much Gold in their system, without increasing the productive output. This looted wealth, did not created prosperity in Europe but caused high inflation.
People started dying from Hunger. Rodents obviously spread on dead bodies, leading to a plaque called Black Death. Horrifying Black Death spread all over, killing 33% of the European population.
This thirst for Gold, eventually led to destruction of whole Europe. Remember that Wealth should never be accumulated, it should be distributed. But Mongols, wanted the Gold from everywhere. If you accumulate, all the gold in the world, you will not end rich, because gold will loose its value.
Subscribe to:
Posts (Atom)