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Unformatted text preview: stment in a given year, she
invested in it one year late.
In other words, if X is the
best investment in 1956,
then invest in it in 1957.
Why did the editors
choose to proceed this
way? Because they
believed that many people
only invest in a “hot”
investment when it is too
late. In other words, they
invest in it after they have heard
about it, but investing in it after
they have heard about it is usually
too late. Think of an investment as
a mountain. Going up the mountain
is comparable to increasing returns
on the investment; going down
the mountain is comparable to
decreasing returns. It’s only when
the investment is near its peak that
many people hear about it. Then
it’s too late, with no place to go but
Here’s an example. A person
with a crystal ball, or with perfect
foresight, would have invested in
the Polish stock market in 1993,
when no one was talking about it,
and reaped a 754 percent gain. The
typical investor would have invested
in it one year later, in 1994, when
everyone was talking about it. The
problem is that the Polish stock
market fell by 55 percent in 1994.
So, what would the person who
is always one year late have earned over the twentieth century? After
taxes and dealer costs, $290.
What are the economic lessons
here? First, the best investments are
often the ones that you don’t hear
about until it is too late. Second,
ignoring the first lesson, and thinking that a popular investment is
necessarily a good investment, is
often the way to low returns.
ABOUT IT Many people seem to
think that when it
comes to investments, whatever an
investment did last year will be what
it does this year. If it went up by 30
percent last year, well then it has to
go up this year by 30 percent.
Consider the words of Warren
Buffet, one of the most successful
investors of all times: “If past history
was all there was to the game, the
richest people would be librarians.”
What do you think: does anything
guarantee that the future will look
exactly like the immediate past? Section 3 Futures and Options 453 16 (428-459) EMC Chap 1...
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This document was uploaded on 01/16/2014.
- Winter '14