A Guide to Investments

October 3, 2008

Why do people make investments? Because they want to make money. Cool. Simple. But how do they know that their investments will make money? They don’t, really, and so they have to make a guess. When you invest, you are making a prediction about the future value of some asset you invest in. There are all kinds of different ways to make that prediction.

Some people look around them and try to spot trends.

Some people use savings to start their own businesses, thinking that their idea is sure to be generate a good return on investment.

Some people don’t really want to spend a lot of time researching stocks or starting their own business, and so they pick some easy, “safe” investment, like money market funds or treasury bills.

The point is, everybody is making some kind of prediction about what assets are worth, based on what they think people are going to want in the future. People who discovered Starbucks in 1992 and decided to invest were right; people drink a lot of Starbucks coffee now, and their investment has paid off. People who thought that satellite phone was a good idea were wrong, and they lost all their money.

In this current crisis, we have a bunch of people who thought that housing was a great investment, one that was guaranteed to bring a good return for years and years. Because they believed this, they bought houses and other assets whose value is related to the value of houses. They thought people would want a lot of housing in the future, and as it turned out, they were wrong. Now we have too many houses, and people are losing their money.

But people don’t want this excess housing to be devalued. They want the investors to have been right. The problem is, the market is not your boyfriend.* Even though you spent a lot of time and energy making something you thought people would really like, they still don’t have to pretend that they like it and say it’s just what they wanted so that you won’t feel bad. The market is brutally honest.

“I appreciate the house. That was really thoughtful of you. But actually, I’d rather have a PS3.”

The proposed solution to the financial crisis amounts to forcing people to take things they say they don’t want. Where do you think the $700 billion is going to come from? We’re being forced to forget about what we really want so that investors won’t feel bad about building us homes we have no use for. This strategy doesn’t make for a happy relationship, and it doesn’t make for a happy economy, either.

And, without further ado, here’s a monkey:

Special thanks to Ed Emberley for teaching me to make all the wonderful drawings that are included in this post.

* In my limited experience, it seems like women give gifts because they are being thoughtful, whereas I mostly give gifts to avoid getting in trouble. I could be misunderstanding women (not for the first time), or I could be a non-representative guy.


One Response to “A Guide to Investments”

  1. tripinchina Says:

    What an amazing post!!


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