Once upon a time, there was a man who lived nearby a casino. On his way to work everyday he passed through the casino floor and put a quarter in one of the slot machines. He always played the same machine and he always played a single quarter. By chance, he won every single day! He would put his quarter in, pull the handle, and the machine paid out five dollars. He would collect his winnings and then head off to work, confident that he would be able to pay for lunch that day.
This amazing streak of luck continued. Day after day. Week after week. Year after year. Every day he won five dollars, and every day he bought lunch with the money. It went on for so long that he became accustomed to his daily winnings. He came to consider them a reliable part of his income. So reliable, in fact, that he eventually began to feel entitled to his daily winnings.
Then one day, he dropped his quarter into the slot and nothing happened. No bells, no flashing lights, and most importantly, no five dollars! He was stunned. What happened? Someone was obviously cheating him out of his rightful earnings. That was *his* five dollars, after all. How could people be so selfish and heartless? How would he afford lunch today? He couldn’t believe that he was going to go hungry because of someone else’s greed!
He went to complain to the owners of the casino. He explained that he was counting on that money to live on, and they had no right to take it away from him! When he demanded that they turn over to him what was rightfully his, the casino owners just laughed. They told him he was welcome to continue playing games in their casino, but expecting to win every time he played was very foolish indeed.
So the moral of this story is, if you are going to gamble on the stock market, be willing to accept the risk of loss. There are a lot of people complaining right now about the current meltdown in the financial sector. Some of them are complaining about the fact that a few crooked bankers and hedge fund managers have poisoned the well. That’s fine. The people guilty of committing fraud, in any of its myriad manifestations, should be held accountable. But fraud is already against the law. There is no need for additional government oversight or regulation of the markets.
What is needed is a little bit of education. Just because the stock market has traditionally returned eight percent does not mean that everyone who puts money into the market is going to get an eight percent return on their investment. Many people will get no money back at all. That is the risk you take. Historically, the stock market has been more reliable than a slot machine, but that does not mean that there isn’t still some risk involved. Caveat emptor.
What we are witnessing today is simply that risk playing out in reality. It hasn’t been this bad in 80+ years, but does anyone truly think we can fix the system in such a way that this type of thing will never happen again? Does anyone believe that we can eliminate the risk? Even if we could, a risk-free market is not going to return eight percent, I can guarantee you that. So be careful what you wish for: fixing the broken market just might turn it into a slot machine.
Great story!!!Entitlement – one of our societies, our wolrds greatest evils – also one of the hardest to ever reverse.Talk to soon, Eric
Hi.So what if the gambler comes to you and says “I have a sure thing that will pay better than the 3% bank return.” And a whole bunch of other folk are saying the same thing. And just for taste, suppose the gambler is in fact a banker. Would you go with a sure thing at 3% or a sure thing at 4%? When the gambler looses your money, and slinks home to his million dollar mansion to let his servant bring him the very best whisky in a crystal goblet, and his maid rubs his sore feet, will he sell some of his gains to pay your loss? What do you think the chances are?If you are going to model the current crash as a gamble that has not paid off, you need to be much more complete and deal with the outright criminal activities and the disassociation of risk and loss from profit.
As I said, “The people guilty of committing fraud … should be held accountable.” Is that not sufficient?If anyone tries to sell you something that seems too good to be true (regardless of their credentials), it probably is. When your banker/gambler presented his business case, did you nod politely and then open your checkbook, or did you do your due diligence and investigate his claims? If the former, you are probably just as culpable as he for the loss. If the latter, and you still invested your money, there is no one to blame, you simply put your chips on the table, and your number did not come up. Sorry. Better luck next time.
Great analogy Jerry! The story seemed so simple, I was wondering where you were going with it. When you connected it with today’s financial crisis it struck me as genius!You’re exactly right. I am totally bummed that the money I have in mutual funds has gone back 10 years. They always say, “if you think long term, and put in the time, the market will pay off.” Well I just put in 10 years and got nothing! But if you look at it that way you’ve got the wrong perspective.My thought is, you don’t lose money unless you sell. Your money may lose its value, but if you don’t use it, or take it out, or sell, then you haven’t lost anything.To beat the market you must have hope, and perseverance. You must be able to stick it out, stay focused and not give in to its temper tantrums. When my kid has a meltdown and is throwing a major fit that appears like it is the end of the world, I just know that in a few short minutes it will be over, and things will be peacefull again.If the market can drop so fast, so quickly, doesn’t it also mean that it can rebound and rise just as quickly as it fell?I’d like to think so. At least that’s what gets me through the storm.
Good thinking and writing
Keep up the good work!