Think of an investment as a mountain going up the

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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 down. 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. THINK 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.

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