Hello again, I was wondering if posting this or not, for some of you this will be investment 101, fairly simple stuff, but for others it could be at least a bit instructive. Well, I decided to go ahead, so bear with me a little while.
First of all, sometimes we think of investors as Wall Street millionaires and brokers, but as Danny De Vito said once it really is “Other people’s money”. Investors place money in commodities, shares, foreign debt, private loans, government bonds, etc., now, this money comes from pension funds, savings account in banks, mutual funds, and the sort, so the fact is that you may be an investor and not even be aware of it.
My grandfather (who happened to be quite wealthy) used to say the stockmarket was a casino where you went to play with a little beter odds, he died bankrupt BTW. So, if you are looking for profit, what you essentially need is a company which is profitable, financially sound and is issuing shares to gather funds to expand, the cost for the company is selling part of itself (that is what the shares are, little bits of companies).
Now, you can also buy loans, let’s say someone bought a house for 250.000 US$, after interest and costs, the 30 year loan will add up to (let’s say) 450.000 US$, that loan may be sold in the market for 380.000 US$, you buy it and when the person pays you will have made 70.000 US$, of course, to buy the loan you have to make sure that the person can pay it, if you don’t, you will lose money.
Countries also issue debt, government guaranteed bonds, these are valued at (again let’s say) US$ 1.000 and the government will sewll them to you at 920 US$, when the bond reaches its expiration date, you can collect your 920 + your 80 US$.
Commodiites are a bet on the future price of something, as an example, gold or coper, even rice, you buy a paper worth x amount of tons and sell it when the price goes up (if it does).
Now, the problem is that we do not do this directly, there are people which do this for us, in banks, investment firms, etc. An investment firm is basically a desk and a phone, and the net worth of a bank is virtually nothing, the money they use is not theirs, It’s usually yours.
Regarding shres, a company is appraised based on it’s accounting, and accountants are really clever people, so when a company needs a loan, they can overvalue assets, and with creative accounting you can make a bankrupt company look heathy, and if the auditors are not good (or corrupt for that matter), the company may be cleared for trading and sell shares for more than the value of the company.
So in the last crisis, the people whose loans were sold could not paid them, becuae the banks lied about their financial worth, essentially they loaned money to people who could not pay specifically to sell them, get rid of them fast and make money.
Also, the deteriorating economy caused that several companies which were beeing made up to look healthy go bankrupt, less sales simply pushed them over the edge. Even banks which lost about 10 to 15% of their net worth due to bad loans went bankrupt, so we can see that if your business can`t take a 15% loss, it wasn’t very sound in the first place. You can see this on the fact that (as an example) some car manufacturers around the world had to sell some assets and some cutbacks but simply survived, GM and Chrysler didn`t. (they got a bailout paid by all of us), let’s keep in mind that millions were evicted from their homes and got no bailout.
Countries were doing the same thing, once the crisis was over, the mess was out, Greece, Spain, France, Portugal, Ireland, simply called an structural issue. Now what is a structural Issue ? It’s when a country spends more than it can (what it’s getting from taxes) and are getting loans to be passed to their successors in government. Actually mortgaging the country. This was so bad that some countries have defaulted on the interest payments of their debts.
Well, back to investing, if you are desperate for money, you go to a loanshark and accept the higher interest because you need it now to survive and the future is not important. So iyou can see a pattern here, if you desperately need money you raise the interest rate. Of course, when countries need to halt growth, they do this, but this is not what we are talking about. It’s when a financial investment firm start paying a lot of interest for your money, it means DANGER, the higher the profit, the higher the risk.
Someone who does not need money, does not ask for loans, much less pay interest, therefore, the lower the profit, less risk there is.
So if you want to gamble money, bet on risky investment and hope your investments pay off, but don’t complain if you lose money.
If you want to safeguard your life savings, you can buy gold or houses, or esentially physical things you can sell to recover your money, it doesn`t mean you will not lose money, if you buy gold or houses now, it is actually possible these will be less valuable in the future, but you will still have the gold or the house, either you wait for a bette moment ot sell, and even if whatever you bought is worth less, you can sell and save some of the money, but if you buy papers, of course you know that paper is worth about 50 cents a pound, that is all you get, those papers are valuable if the company or government that backs them up actually exists, if it doesnt, they are worthless.
Please keep in mind this when your broker tells you about a certain deal, remeber they operate on a commission and they will sell you dung if the commission is good enough.
Have a nice day