Oct 11 2008

Financial cracks and the lost memory

In this days a huge earthquake is attacking the biggest banking corporations; the most important US banks and, as in a domino game, european banks are staggering. Quite everyone I chatted to about this bad news said me he is loosing a lot of money in stocks. I'm really concerned about the future of my friends involved in this crack but even about the future of the community, because this fact highlights how simple people watch to the misleading world of finance without weighing up the risk.
I dont argue about the facts that moved banks toward the bankruptcy in these days, but I thought a lot to the evidence that a lot of people is heavily involved in stock loss.

Anyone should know that stock investment is risky, events like 0911 demonstrate that over the natural volatility in stock prices, unpredictable facts make stock price moves even more random. Avoid taking this into account is a big mistake.

Remember the NASDAQ bubble blown up in 2000, in short the index decreased from 6000 down to 1200, losing quite 80% of its values. Just before that bad days analysts had said that IT market would have grown again and again... trusting in this announcements a lot savers lost much of its money.
Even if the trigger of the crisis in this days is quite different from the one involved in NASDAQ collapse, the environment is mainly the same: a lot of uninformed little investors put a lot money in risky investments, and then they lose everything.
I think that people forgot the lesson of NASDAQ and continue to put money into the market. This is due mainly to two factors:

  • trust in brokers
  • attracted by big profits.

in both the two cases people mainly act without the correct study in the matter.

The first class, the broker truster, should think to the fact that financial products are the only product on the earth sold without guarantee. The law is particularly strict towards defective products, builders are prosecuted by law if their products create damage to a person. The law is not so strict towards brokers selling "defective" investments, the broker always takes profit from transactions even if the investor is losing it money. Why? Why one should assign a broker in management of oneself money even if the broker cannot ensure any profit?

The second class of investors, the set of people really confident in profits, should know that the stock market is mainly a zero sum game.  Generally speaking, a zero sum game is a game in which the gains and losses in a situation net out to zero. This means that somebody wins, somebody loses; money is simply transferred from one to another.

These two points of view should make us argue about the real nature of the stock market and its operators: real investors should pay more attention to real economy than to virtual economy and little investor should choose products in first person or, if a broker is assigned, at least they should consider only the less risky investment.

One response so far

One Response to “Financial cracks and the lost memory”

  1. Barry Whiteon 04 Jul 2009 at %I:%M %p

    Topic of your article is very interesting, i have bookmarked your blog
    regards

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