So puppy, you are thinking about investing in the bone market? That is very wise of you. Indeed as the bone market has been losing more than 50% in the past 6 months, there is strong untapped potential for superior return on bone investment. As a matter of fact, I can guarantee that if you are willing to forego this bone today, you could get close to two bones over the course of only six months! Interested? “Woof”? I’ll take it as a yes.
So we just agreed that you are going to invest that bone in order to get two bones tomorrow. Don’t forget that because of inflation, your two bones might actually be smaller tomorrow that they are today. Not by a lot, maybe just 97%, so you should no worry much. Also bear in mind that I have my transaction fees, therefore I’ll have to take maybe 5% of your initial investment since I need to take your bone to the bone market and that takes some effort. Think about pushing a button. Can you push a button puppy? I thought so…
So now that you made your first move as a bone investor, you may want to consider more aggressive products. How about bone derivatives for example? Confused? No need to, it is risk free! Here’s how it works: instead of buying a bone today, you are going to promise me that you will buy a bone tomorrow for say, one treat. To make sure that you will honor your contract, I will ask you to give me one tenth of a treat immediately as a commitment between us. Give me your paw: Good Dog!
Here is the beauty of it: if the price for one bone tomorrow is actually two treats, since we have this contract you will only have to pay one bone for half the price. And this only cost you this tenth of a treat initial commitment. Indeed if prices go the other way around, you do not need to pay me anything; I’ll just forget it and only cash-in your initial tenth of a treat investment. Nice no? Wait. It gets better…
See puppy, as a smart investor, you want to minimize your risk. What if I was wrong and what if the market actually tanked? With so many people dying of starvation due to the economy, bones could become a commodity very soon. You want to protect yourself against this. Because you are so adorable, I am going to teach you how to HEDGE. Your tail is moving so fast! I am excited too, puppy.
So, because you are such a smart dog and since you have smelled with that big snout of yours that bones might be worthless tomorrow, but at the same time feel that you could also be very wrong, we are going to make sure that you are right all the time. How?
Well first you are going to buy a bone stock now as we previously discussed. That’s the part of you who really wants to believe that the market will go up, since you trust me so much, which is normal as I am your master.
However, because you know that I never lie, we are also going to make a bet on the fact that I might turn into a pile of bones, only much earlier than expected since I cannot afford restaurants anymore. Therefore, you are going to BET that bones are going to be almost free tomorrow, i.e. worthless. Consequently, I will only take one tenth of a treat from you today for the commitment that I will buy a bone from you tomorrow at the price of one treat. If I am still alive, then we forego this stupid investment and you will have made (ex commission and inflation): 2 bones (value of your one bone investment tomorrow) – 1 bone (your initial investment) – one tenth of a treat (the cost of the option). With treats trading at bone parity today, that’s 90% of a pure bone profit puppy!
Conversely, if bones end up being commoditized, for example because we have start printing too many of them to reimburse your Pekinese cousins, then you’ll still have our other commitment i.e. the bet and you will have made: One treat (cost of me buying it from you tomorrow) – 0 (cost of the bone for you to buy tomorrow) – one tenth of a treat (the cost of the “bet”) – one bone (the bone you invested in the market); that’s only a loss of one tenth of treat (plus my fees, but I love you so much so it should not matter).
See puppy? You can never lose! Yay!
But my furry cutesiness, why not make ONE MILLION bones instead of just one? For that you would only need to invest another million bones! Don’t look at me with those adorable confused eyes; I know that you do not possess that many bones. That’s fine. I will LEND you those bones. That’s called leverage.
Because you are my dog, even though you only own one bone today and even though your capacity to dig bones in the garden is limited to one extra bone per month, I still trust you and I am willing to lend you those extra 999.99K bones. Of course, I do not own them myself, but that’s ok: see puppy, the funny thing that you keep on sniffing while I am sitting on the coach, is a computer. A computer is somehow a bone printing machine. Once I input our contract together, the bones are virtually created, even though I do not possess them!
For you two benefits:
- First you could generate One million Bones by investing only one; in addition I will only ask you to make the first monthly payment of 50,000 bones next year; that’s seven years for you puppy! And if you cannot make it at that time, we’ll send you to the butcher but then you always have the recourse to file for bankruptcy which, means that no butcher will ever wamt to sell your meat and hence your risk is nil.
- Second, if you ever want to introduce yourself on the bone market, bone investors will appreciate the fact that you created bones out of thin air. Actually the market loves leverage, so even more bones for you then! That’s my dog!
For me the risk is also very limited for two reasons: first, even though I do not have the bones in handy, I will use someone else’s to make sure that we can honor this virtual million bones that we just created from scratch. Actually I even plan on emitting some contracts with other investors that are willing to bet on your ability to reimburse me; you know Finnish people puppy? Well, they LOVE to bet. So the risk will becomes theirs. And since the rating agency is a friend, it will assess that those contracts are risk-free too!
Don’t growl. There is nothing wrong with this. Those contracts are called securities, which means that they are secure. Moreover, there is actually a very complex math formula that guarantees that the risk is nil for everyone. Do you know math puppy? Neither do I. So who are we to say it’s wrong?
In this process, I have made you, the investors and myself very rich. Because first we have created a virtuous cycle of good moodiness, i.e. everyone is making a ton of bones and is optimistic about the fact that the bone market will grow forever to the power of infinite. That means bones galore puppy. Second, if the bone market was ever to crash, our cumulative losses would be so high that there would not be enough bones in the world -including those in the cemeteries you dream so often about- to pay our creditors; that means that the Government and the other puppy masters will have to guarantee those bones for us. We’ll be “too fat to be skinned”. Good for us puppy!
Keep in mind that in that extremely unlikely scenario, we would still want to back ourselves, just in case. I don’t want you to starve, my delicious companion. So we’ll do two things: first, we’ll write a contract guaranteeing you (and me) a big bone bonus for just being there. When the other dogs who had to bail us out, discover that we are using their hard-dug bones, past, present and future to pay ourselves, we’ll argue that the law is the law and that we had this commitment between us for quite a while. Smart, eh? Finally, if someone ever wants to fire me as your master, I’ll explain that by teaching you all those funny bone finance concepts, I made you such a complex dog to handle, that only I can understand and tame you. For that I’ll need to be paid big bones. So you see, between all of this and my commissions, I can never lose!
You fell asleep puppy? I am sorry baby, that was a lot to take. I wish we had covered more topics. For example you could have asked me whether betting against the market is actually creating value or ultimately counterproductive… But we can pick it up tomorrow. We have time anyway. The growth is here to stay…
Filed under: Ich'sms, business, thoughts | Tagged: LinkedIn, Stock Market for dummies, market counter-productivity, FInance 101, Recession 101
